Parents, especially those with young children, often find themselves thinking about how they will set aside money to help pay for college. They want the best for their children in hopes they will spend more time on their studies versus stressing over student loans.
CPS Portfolio Analyst, Derek Oxford, shares a recent conversation he had with a parent. “I was approached by a husband whose wife just gave birth to twins (a boy and a girl) He understands how important it is to save for college for his newest family additions, but when we spoke, he didn’t know exactly how or where to begin. It can be a taxing subject for everyone.”
In 1996, the IRS created a qualified tuition program to begin a savings plan. You might have heard about the 529 plan. Oxford says, “With 529 contributions, residents of states with state taxes can deduct a portion of the amount contributed from their adjusted gross income.” In Florida, residents benefit from billions in tourism dollars, so state taxes are currently unnecessary and don’t provide a deduction for 529 contributions. Oxford says “Even without the tax deduction, saving for college in Florida is a great way to allow assets to grow tax-deferred and possibly withdraw them tax-free assuming the withdrawals are for qualified expenses.”
The 529 code allows for two plans: pre-paid tuition plans and state college savings plans. In June of 2017, savingforcollege.com rated Florida as the 5th best plan in the nation for its pre-paid plan. With the pre-paid system, you can “lock in” present rates for future cost at Florida colleges or universities. This money can be used for out-of-state eligible schools, but the plan is based on Florida expenses. In 2015, plan costs were almost reduced in half, making it much easier for parents to pre-pay tuition. Oxford says “With the college savings plan, the money inside can be used for any qualified expense at an accredited college or university, regardless of the state of residency.”
But Oxford points out, “Here’s the caveat on college savings plans; they grow based on market conditions and are in no way “locked in” for any specific period of time. The owner’s level of risk will determine how much or how little the account will grow over time. On average, the S&P 500 has grown 9.8% each year over the past 90 years per the Standard & Poor’s website. So, the potential for this money to grow is astounding!”
So, what if your child decides not to go to college? With the pre-paid system, you get your unused contributions back minus some administrative fees, but no growth of your money. With college savings plans, withdrawals are tax-free if the money is used for qualified expenses at accredited institutions.
Those expenses are tuition, room and board, peripherals like computers, calculators, books and school supplies. Withdrawals not qualified in the state of Florida will be taxed at the federal level along with a 10% penalty. Pay close attention to the expenses coming out of pocket for college as some may and may not be qualified. Oxford says, “Providing this educational knowledge to the CPA father was quite an undertaking, but I know he’s in a better position to make a decision for which plan he would like to use. Actually, if you have enough in excess saving, it’s possible to do both!”
Speak to a trusted advisor about how college savings will fit into a sound financial plan to ensure you are prepared for your own retirement.