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Why You Must Start a 529 College Savings Plan Early

Why You Must Start a 529 College Savings Plan Early

February 14, 2019

Recently my wife and I were blessed with our first child. A happy, healthy boy named Tommy. Even before he was born, I began to worry about the burgeoning costs for college, and what this might mean for his opportunities in life. My generation has more student loan debt than all other previous generations combined. Over the long-term, college tuition has been increasing by three percent to six percent above inflation. 

To help prevent Tommy from being saddled with substantial student loan debt, I opened up a savings vehicle for education, the 529 College Savings Plan.

529 plans have many great features. When a child is born, it is not clear how responsible they will be with money or what education path they will take. With a 529 plan, the donor owns and keeps control of the account and how the money is spent. The owner also has the option to change the beneficiary at any time. As long as the funds are spent on qualified education expenses, no income taxes are due. If the funds are used for a purpose that is not qualified, then a 10% penalty tax is due on the earnings.

It may also be beneficial to open up a 529 plan with your state. Over thirty states offer a tax deduction for 529 contributions, including those located in the DMV (Washington D.C., Maryland, and Virginia). There are no income or age restrictions for these plans and no upper limit on annual contributions. Please note that if you contributed more than the annual gift tax exclusion, currently $15,000, then the excess amount would count towards your lifetime federal gift tax exclusion. Also, a lump sum gift may be made for up to $75,000, and the IRS will treat the gift as if it was spread out over five years.

So long as no other contributions are made during the five year period, it will not count against the lifetime federal gift tax exemption, currently at $11.4 million for an individual. Contributions can be made as a lump sum, by regular contributions, or both.

The new TCJA tax code also allows that $10,000 can be distributed from a 529 plan each year to pay for private kindergarten through twelfth-grade tuition.

It is never too early to begin saving for college. This is what my wife and I are doing for Tommy!

You can open a 529 plan before the child is even born by opening it in your name as the owner and beneficiary, and then switching the beneficiary to the child once they have been issued a Social Security number. The earlier you start, the more time the account has to grow through the benefit of compounding. Rising college costs show no sign of abating, so we encourage you to ask your Financial Advisor about opening a 529 plan.


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