By Debbie Placke, Vice President, Manager, Financial Planning Tools and Marketing
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What is the significance of May 29 (5/29)? Today is recognized at National 529 College Savings Plan Day!
Do you know there is a way to save up for the big expense of a college education that has tax advantages which could help your savings accumulate considerably more growth than a typical taxable savings account? A 529 Savings Plan is an education savings plan that is designed to provide tax-advantaged savings for future education costs, specifically for K-12 tuition expenses at public, private and religious schools (up to $10,000 per year) and a variety of qualified expenses at colleges, universities, trade schools, or other post-secondary education institutions.
Currently, the national average for tuition and fees at a 4-year public in-state college is $10,230 according to The College Board, Annual Survey of Colleges; NCES, IPEDS Fall Enrollment data. Add in room and board, books and supplies, multiply over 4 years, and include an average inflation rate of 7%, and the total cost for a 4-year degree can be exorbitant.
A tax-advantaged 529 savings plan can help in accumulating a nest egg to pay for these future education expenses. The earnings and distributions are federally tax free as long as distributions are used for qualified education expenses. Depending on the state, these plans may also offer state tax deductions or credits for in-state residents.
For comparison purposes, you could start to save $10,000 a year in a taxable savings account to cover the cost of a child’s education, but equate that to $10,000 a year savings into a 529 plan and you could see a larger accumulation – more than $7,000 over a 10-year period assuming a 5% rate of return on the investments and a 25% federal marginal tax rate. Add in a state tax rate of 10%, and it could result in an even greater accumulation.
| Summary | Fully-Taxable Savings | Tax-Free Savings | Difference
$ |
% |
|
| Annual Savings | $10,000 | $10,000 | |||
| Number of years to invest | 10 | 10 | |||
| Before-Tax Return | 5% | 5% | |||
| Marginal tax Bracket | 25% | 25% | |||
| After-Tax Return | 3.8% | 5% | |||
| Future Account Value | $118,678 | $125,779 | $7,101 | 6% | |
| State Tax Bracket | 10% | 10% | |||
| Future Account Value | $115,967 | $125,779 | $9,812 | 8% | |
During the month of May as graduations are happening all around us, it is a perfect time to consider how important a good education is in today’s world. Don’t leave yourself vulnerable and scrambling for a plan to pay for that education by using up your retirement savings or accumulating a lot of debt through loans. Instead of spending thousands of dollars on toys and other things for your children or grandchildren, consider investing in their future education.
Talk to your Benjamin F. Edwards & Co. financial advisor about your options for saving for and funding this very important goal.
Benjamin F. Edwards & Co. does not provide tax advice, therefore it is also important to consult with your tax professionals for additional guidance tailored to your specific situation.