529 plans, also known as “qualified tuition plans” have been available since 2001 and are designed to encourage saving for higher education through tax deferral. In my opinion, they are one of the sweetest deals around. It’s no wonder 529s have grown to total more than $144 billion.
Here are some client comments about 529s, and why they use them.
College costs may make you dizzy
With the cost of one year of private school college tuition and room and board now over $50k in many cases, new parents may not even want to think about how much they’ll eventually pay. But they should. Today’s newborns may face four-year college costs from $280k – $550k in 18 years!
On the other hand, a college degree is valuable. Graduates earn significantly more and have more career choices. Here’s what the Census Bureau has to say about the value of a college education:
Value Of A College Education
|LEVEL OF EDUCATION||AVERAGE ANNUAL EARNINGS|
|High School Graduate||
|Some College, No Degree||
|Master’s Degree or Higher||
Source: U.S. Census Bureau, 2006, PINC-03
With all these numbers in mind, I polled Osbon Capital clients about their use of 529 plans. (This SEC site is a great reference explaining 529 plans, by the way.) The responses I received showed admirable foresight and highlighted the long-term benefits of 529s.
A tax incentive that works
Respondents stressed the tax benefit as a big part of their decision to use 529s:
J: “We have 529s because of their tax advantages. We use our home state’s plan because of the extra state tax deduction.”
D: “529 plans are an example of a tax incentive that works.”
C: “I love having something that’s tax free!”
I agree completely. There are fewer and fewer tax breaks available to investors. Contributions to retirement accounts (tax-deferred) are limited by amount and income. Tax, interest, medical, and charitable deductions have become progressively more limited. Tax shelters are a thing of the past.
529s help you save for one of your most important life expenses and do it free of taxes, both as you accumulate and spend higher education dollars. It’s an obvious win-win.
Save now. Benefit later.
Clients recognized the importance of saving, even when college is many years off:
J: “We’ve ‘front-loaded’ our elementary-school-aged children’s 529s with what we expect will be all the money they’ll need for college, to get the maximum benefit of the tax-free growth. If we’ve put in too much, the penalties for withdrawing it for other purposes don’t seem too severe.”
C: “Having these accounts with the money segregated offers me some peace of mind.”
D: “As to how much I invest, like most other people, not enough.”
For grandparents too
One of the most interesting responses to my informal poll was this story about the potential multigenerational benefits 529s can have:
C: “The reason I started with the 529 plans was for my parents to have a vehicle to invest and contribute to their grandchildren’s education. Education was an extremely important theme in my dad’s life. (He was basically an orphan from age 2 and went to MIT on scholarship, received a PhD in chemical engineering and made a wonderfully happy, productive and successful life for himself and his family.) He was looking for a vehicle like the 529 plan. He didn’t want his money going to his grandchildren’s pursuit of a BMW!”
This article may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.
Nothing in this article is intended to be or should be construed as individualized investment advice. All content is of a general nature. Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice.
Any references to third-party data or opinions are listed for informational purposes only and have not been verified for accuracy by the Adviser. Adviser does not endorse the statements, services or performance of any third-party vendor without specifically assessing the suitability of a third-party to a client’s or a prospective client’s needs and objectives.
Consult a tax professional regarding tax treatment of 529 plans. Comments of clients are their own opinions and are for representative purposes only.
This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.
Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.
Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.
This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.
While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.
Adviser does not endorse the statements, services or performance of any third-party vendor.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Any IPO alerts are purely informational and should not be construed as recommendations to invest.
Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.
Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.