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Maximizing Education Savings: A Guide to Financial Planning for 529 Day

Maximizing Education Savings: A Guide to Financial Planning for 529 Day

May 01, 2024

Education planning is fundamental to securing your child or grandchild’s future. By leveraging tax-intelligent savings vehicles and exploring state-specific benefits, you can take proactive steps to alleviate the financial burden of college expenses.

National 529 Day is happening at the end of this month to encourage families to save for their child’s education. 529 Plans are incredible education savings tools, but there are also a lot of great investment options to consider as well. So, the experts at Couto DeFranco Wealth Management are breaking down several education savings options available for you and your loved ones to consider.

But why is this important to think through now? Today, the average cost of college tuition and fees in New Jersey is $14,184 per year for public institutions.1 If we zoom this out to four years, it is at least $56,000, not including housing, books, school supplies, meals or other expenses that happen during college.

An education savings account – whether it is a 529 Plan or another savings plan – will play a critical role in your child or grandchildren being able to attend the college of their dreams.

Understanding Education Savings Vehicles – What are the options?

To effectively plan for education expenses, it’s crucial to understand the different savings vehicles available, along with their specific features and limitations.

529 Plans: These tax-advantaged savings plans are designed to encourage saving for future education costs. They allow you to put money away for a beneficiary (your child or grandchild) and use that money tax-free to pay for educational expenses. In New Jersey, residents with a gross income of $200,000 per year or less can take advantage of NJBEST, New Jersey’s 529 college savings plan, which offers a state tax deduction of up to $10,000 per taxpayer per year. Additionally, the New Jersey Higher Education Student Assistance Authority provides a matching contribution of up to $750 for families with a household income under $75,000 when they make their first contribution into their 529 college savings plans. Other states may offer their own state-specific options for tax-advantaged education savings.

Roth IRAs: Roth IRAs offer tax advantages for retirement savings and can also serve as educational savings vehicles. Contributions are made with post-tax dollars, and qualified withdrawals for education expenses are tax-free. Contribution limits apply, with individuals under the age of 50 limited to $6,000 per year. In addition, Roth IRAs are not limited to being used for only educational expenses. So, if a child receives a scholarship or chooses to not attend college, the funds are still available to use for other expenses.

Traditional Savings Accounts: While traditional savings accounts offer flexibility, they provide limited tax benefits compared to other options. Additionally, with the higher flexibility, you run the risk of tapping the accounts for non-college related expenses, depleting the college fund.

Benefits of 529 Plans

529 plans offer numerous benefits, including tax advantages, flexibility in choosing beneficiaries, and various investment options. Usually, there are no annual contribution limits, and deposits up to $18,000 (or $36,000 for married couples filing jointly) will qualify for the annual gift tax exclusion. Total contribution limits for a 529 plan in New Jersey are $305,000.

529 plans also offer interesting front-loading opportunities as well. You could elect, under the gift tax, to front-load a 529 plan and contribute five years' worth of annual contributions of $18,000 in one year to total $90,000 per beneficiary per donor.

Withdrawals from 529 plans can be used for college, graduate school, and K-12 qualified expenses, including tuition, fees, room and board and other related costs. If the money is used according to IRS guidelines, the withdrawals aren’t subject to state or federal taxes, and you may even benefit from a tax deduction in some states.

Additionally, under new changes in the SECURE 2.0 Act effective January 1, 2024, if the plan is at least 15 years old, up to a $35,000 lifetime maximum can now be rolled over into a Roth IRA. This is great news for those who have funds left over, but who still want to contribute financially to their beneficiary’s future. 

Roth IRAs and Other Alternatives

Roth IRAs are very flexible and offer a range of tax benefits. You can invest in stocks, bonds, mutual funds, and exchange-traded funds of your choosing. Withdrawals from a Roth IRA are allowed penalty-free for qualified education expenses. However, they will generally be included as income in determining financial aid eligibility.

Traditional savings accounts provide investment flexibility but fewer tax advantages and few growth opportunities.

Creating a Tax-Efficient Education Plan

Balancing different savings vehicles and considering long-term goals are essential for creating a tax-efficient education plan. Contribution limits, income restrictions and potential tax implications should be carefully evaluated. Our team at Couto DeFranco Wealth Management is here to help tailor a strategy that aligns with your specific needs.