I have one of the best jobs in the world. In my role as President of College Funding Solutions, I get to hear the dreams of teens planning to go to college, and it allows me to flash back to when I was in their shoes. While I play the “bad cop” and “financial responsibility” cards on behalf of mom and dad, I revel in helping to shape the college decision process of these young adults. That sure beats being a Tax Accountant any day of the week!!
Saving for college using 529s can be daunting. You must accumulate a large amount of money in less than 18 years, then you burn through it in 4 to 5 years. For these reasons, you have little room for error. Follow these tips to maximize the amount of funds you will have available for your kids.
1. Transfer 529 Ownership & Maximize Financial Aid – Many folks are a little miffed when they discover that after saving in 529 plans for years that their Expected Family Contribution or EFC (the minimum amount the government feels you should pay for college) goes up by 5.64% of amounts held in those 529 plans. This includes 529s for the student’s siblings! Therefore, consider transferring account ownership to the student’s grandparent or aunt or uncle so that the 529 assets do not get reported on the FAFSA. The downside of these “outside” 529 funds is that withdrawals will be treated as student income on the FAFSA and will increase the EFC by 50% of the amount withdrawn!! But, you can avoid this FAFSA income by waiting until the student’s sophomore/junior calendar year or later to use the 529 funds.
2. Lower your 529 volatility as you get closer to college – In retirement, the spenddown of your retirement assets hopefully will last 30 or more years, so your retirement portfolio may be able to recover from a market correction. With a short college payout period of only 4 or 5 years, your 529 investment recovery time is minimal. You might be able to weather the volatility while your child is a toddler, so you may have your 529 invested in stock funds. But as your child gets within 10 years of college, you may want to gradually decrease your equity exposure and lock in those equity gains. You can also decrease volatility by rolling over your 529 funds into a prepaid tuition account, as I suggested in a previous blog.
3. Invest in a Prepaid 529 Tuition Plan – Prepaid tuition plans allow you to purchase college credits at today’s cost, and your investment will essentially grow at the inflation rate of college. College costs today are rising at 3% or so per year, so investors in these plans are typically more concerned with not losing their college savings than in maximizing potential returns.
4. Pay Private K-12 Through Your 529 – The Tax Cuts and Jobs Act enacted in December 2017 permits families to use up to $10,000 of 529 funds to pay for private K-12 each year. (Check first with your state as some have not adopted the federal rules pertaining to K-12.) If your state permits you to use 529 funds for private K-12, you can get an easy tax deduction by “routing” your private school tuition through your 529. In other words, instead of writing that $10,000 check to your private high school, make it payable to your 529 plan, then direct your 529 plan to pay the school. Here in Pennsylvania, this technique would save you $307 on your Pennsylvania income tax return at our 3.07% tax rate. However, don’t just focus on K-12 as college arrives shortly thereafter, and you don’t want to be left with an empty 529 account at high school graduation.
5. Sign up for the Free Sage Scholars Program – While you are contributing to you PA 529, please sign up for the Sage Scholars program. This program functions like a free “frequent flyer” (dollars) program that you can use at certain private colleges. There is no cost to join. Since the PA 529 program is a participant in the Sage Scholars program, each quarter you earn Tuition Rewards equal to 2.5% of the value of your PA 529 account – adding up to over 10% per year. The earlier you sign up, the more points Tuition Rewards you can rack up before college.
Like any investment vehicle, 529 Plans have their pros and cons. However, if leveraged appropriately, they can be very effective in helping you to pay for your son or daughter’s educational expenses. Regardless of your 529 account balance, you still need to target those colleges that minimize your out-of-pocket cost (after aid). Contact me directly at firstname.lastname@example.org to find out how.