We all know college is a huge expense, but the cost is also going up every year. College tuition inflation is increasing at 6 percent per year. That compares to the average consumer inflation of 2 percent and wage inflation of 3 percent. College costs have skyrocketed faster than any other expense (including healthcare!) over the past 30 years. Ouch!
Luckily there is a savings solution specifically designed to prepare for these costs – 529 College Savings Plans. The benefits to families of investing in a 529 plan are tremendous, but 70 percent of Americans don’t know about these tax-advantaged plans, and only 14 percent currently use them. Instead, parents often use their personal savings account or choose different saving plans that don’t offer many of the perks and protections of 529s. Others are wooed by a wider range of slickly marketed financial products competing for parents’ dollars. So, we’re glad you’re here! Let’s learn about how your future college kid can benefit from 529 plans.
1. Stock Wars: Return of the Investment
We know that as time goes on, your children grow—but did you know that your 529 investment will too? A 529 has an average annual return of 6-7 percent based on historical data, which means your investment returns could shoot up faster than your middle schooler!
2. Feds with Benefits
All the fun of a 401k without any of the old age! Earnings in your 529 account are tax-deferred. When you make 529 account withdrawals for qualified higher education expenses or tuition for private or religious elementary and secondary schools, earnings in your 529 account are not subject to federal income tax (and, in many cases, state income tax). So when tax day comes around, you don’t even have to look at your 529, because it’s not going to cause you any heart ache.
3. Your State Wants Smart Cookies
In addition to the federal government not taxing your 529, some states (more than 30, including the District of Columbia) provide additional tax deductions and incentives for their residents. These benefits may include deducting contributions from state income tax or matching grants. With state and federal benefits, this means the longer your money is invested, the more time it has to grow, and the greater your tax benefits.
4. Parental Control
Want free money?
Everything seems to have parental control options nowadays: search engines, web streaming accounts, your family iPad, you name it. Yet, many common investment accounts and custodial accounts are designed for minors, which means parents don’t control them. With a 529, parents retain control of the account. So even if it feels like you’re losing control of your wild child on the day to day, you’ll always have the security of knowing they won’t be able to spend their dollars on skydiving and video games as soon as they turn 18.
5. Protect that Asset!
Even in your worst-case financial situation, the 529 you’ve been contributing to won’t be in danger. Qualifying assets in 529 plans – i.e. funds deposited in a 529 plan more than two years prior to a bankruptcy filing – are fully protected from bankruptcy.
6. Low Fees, Yes Please!
With most 529 plans, the underlying fund expenses are very low, especially when compared to other funds, such as life insurance. There are also new 529 services that are even more affordable compared to traditional financial advisors, like the mobile app U-NEST, which waives all broker-dealer commissions and charges a simple $3 monthly advisory fee.
7. You Can Still Get Paid with Financial Aid
Even though you’ll have a good sum of money saved up for your kid, you won’t hurt their potential financial aid opportunities. A 529 is considered a parental asset with FAFSA, so it only affects parents’ Expected Family Contribution (EFC) by, at most, 5.64 percent of 529 plan assets.
8. The Ultimate Gift: One Size Fits All
Your sister wants to get your 1-year-old something amazing that he won’t grow out of within 5 months. Your grandpa wants to get your 15-year-old something cool but pronounces memes like he’s warming up for the opera (“mi mi mi mi!”). With 529s, friends and family can gift money directly to a child’s 529 college savings account, accelerating its growth. Gift giving just got a lot easier (while also being extremely thoughtful!).
9. Yoga-Level Flexibility
The only thing set in stone is that nothing’s set in stone. For this reason, the beneficiary of a 529 can be changed at any time to another child or a different family member. Also, educational expenses include a full range of options (tuition, housing, books, equipment, even schools K through 12). So, your oldest daughter Jane got a full scholarship to her top college and doesn’t need her 529 funds? No problem, her younger brother John can take over easily – maybe he can study music at that private liberal arts school after all.
How to get the best 529 for your kids?
Now that you know 529s are the best way to save for education, where do you go from here? Finding the best 529 plan used to be a long and complicated process of finding a direct-sold 529 through an optimal state program or purchasing a plan through an expensive financial advisor.
But no more! In October 2018, U-Nest launched as the first and only mobile app to simplify the 529 process, replacing what used to take hours of expensive meetings with financial advisors, faxing, copying, and emailing paperwork, with a process that is entirely secure and paperless. You can be set up with a 529 on your phone in about 5 minutes.