One question we always get from clients is: How do we begin saving for our children’s college education?
The first and most important rule to remember, of course, is that it’s never too early to start saving for your child’s future success. Once you have a number in mind – the target amount you want to be able to contribute to each child’s educational expenses – there are a few options you can choose from to assist you in reaching those goals.
The option we get asked about the most is the 529 Plan.
What is the 529 Plan?
There are two types of 529 plans. Most people have heard about the original form of 529, the state-operated prepaid tuition plan, which allows you to purchase units of future tuition at today’s rates, with the plan assuming the responsibility of investing the funds to keep pace with inflation. Many state governments guarantee that the cost of an equal number of units of education in the sponsoring state will be covered, regardless of investment performance or the rate of tuition increase. Of course, each state plan has a different mix of rules and restrictions. Prepaid tuition programs typically will pay future college tuition at any of the sponsoring state’s eligible colleges and universities (and some will pay an equal amount to private and out-of-state institutions).
The second type of 529 is the savings plan. It’s similar to an investment account, but the funds accumulate tax deferred. Withdrawals from state-sponsored 529 plans are free of federal income tax as long as they are used for qualified college expenses. Many states also exempt withdrawals from state income tax for qualified higher education expenses. Unlike the case with prepaid tuition plans, contributions can be used for all qualified higher-education expenses (tuition, fees, books, equipment and supplies, room and board), and the funds usually can be used at all accredited post-secondary schools in the United States. The risk with these plans is that investments may lose money or may not perform well enough to cover college costs as anticipated.
Things to Look out for:
While the 529 Plan is enacted federally, states have the right to make their own decisions regarding state income tax withdrawals, and on just how far you can stretch the “qualified higher education expenses” umbrella. For instance, not all states allow 529 Plan funds to be used towards room and board for the student.
What Counts as Qualified Higher Education Expenses in PA and NJ?
PA offers two versions of the plan: the PA 529 Guaranteed Savings Plan and the PA 529 Investment Plan. The PA 529 Guaranteed Savings Plan allows you to lock-in the future cost of college tuition, so you can save against inflation rates. The PA 529 Investment Plan is an investment performance plan. Both count towards “tuition, certain room and board costs, required books and supplies, fees and special needs services”. You can read more about both plans at pa529.com).
In New Jersey, the 529 Plan offered is NJBEST. Funds can be applied to any accredited college, even those outside the state. According to njbest.com, “Savings may be applied to tuition, fees, required books, supplies and equipment, and room and board if the beneficiary is enrolled at least half time.” You can read more about NJ’s rules and requirements for the plan here (link to: https://www.njbest.com/).
What States Don’t Follow Federal Recommendations?
If you are located outside of Pennsylvania or New Jersey, be sure to look into the specific rules governing 529 Plans in your state. Savingforcollege.com has a state-by-state breakdown of differences here).
If you have additional questions about the 529 Plan in your state, or other options for saving for college, reach out to us any time at email@example.com or 856.482.8700.