Education Planning

A college education is one of the single most important tools for a successful future. The cost of obtaining that education, though, has never been higher, and continues to grow at a rate greater than inflation. Investing now in education for yourself or your loved ones can greatly reduce or eliminate crippling student loan debts.

The knowledgeable professionals at Rollins Financial Advisors will walk you through the various types of education investment options, including 529 plans, custodial accounts, and educational IRAs, and help you best position your children and your family for success.

The most popular strategy to save for college is a 529 plan, named after the section of the Internal Revenue Code which authorized them in 1996. Savings in 529s are tax-deferred and distributions are not taxed when used for qualifying higher education purposes. The Internal Revenue Code was modified in 2015 to allow more education-related expenses such as the purchase of computers and up to $10,000 annually in K-12 tuition.

Participation in 529 plans has grown exponentially over the past couple of decades. Their tax advantages at both the federal and state level make them a very attractive option for families planning for their children’s higher education. They are easy to maintain.  You can set up automatic contributions and account management is handled by the program manager chosen by the treasurer’s office of the state offering the plan. They also give grandparents and other relatives an easy way to contribute.

529 plans are extremely flexible investment vehicles. They usually have lifetime contribution limits and you may contribute up to $75,000 per beneficiary ($150,000 for a married couple) in a single year without the money being subject to the federal gift tax. There are no restrictions on the income of the participating family or the age of the beneficiary. Contributions need not be listed on your federal tax return and deposits of up to $15,000 annually qualify for the gift tax exclusion.

529 plans function similarly to a Roth IRA or Roth 401(k). You invest after-tax contributions in an array of options, often mutual funds, offered by the plan. Performance of your investment options will determine the value of your 529 account. When distributions are made for a qualifying educational expense, investment growth within the account is free from tax upon withdrawal.

Prepaid tuition plans are a second type of 529 plan. Participants can pay all or part of the costs of an in-state college education in advance. Individual colleges and universities can offer prepaid tuition plans as an incentive to prospective students who are focused on a particular institution. Additionally, a group of 250 private colleges sponsors the Private College 529 plan to allow more families the tax advantages of saving for higher education through 529s.

Some families are deterred from utilizing 529s due to uncertainty about educational choices in the future. While it is true that you may have to pay income tax and a penalty on the accrued earnings of a non-qualifying withdrawal, participants have several strategies to avoid this even if the educational opportunity they have been saving for does not materialize.

Non-qualifying withdrawal penalties are waived if the beneficiary earns a tax-exempt scholarship, attends a U.S. Military Academy, dies or becomes disabled. You can change the beneficiary to another family member. This applies to even parents themselves, if they wish to further their education. Funds may also be rolled over to a 529 ABLE account for people living with disabilities. In short, there are many benefits to 529s and strategies to mitigate the limitations of the plans.

Nearly every U.S. state now offers a 529 college savings plan to residents. Most of them allow non-residents to sign up for their plan, though non-residents may not be eligible for all the same tax benefits as residents.

Custodial accounts are created for minor children and managed by parents. They are an effective strategy for families to take advantage of the gift tax exclusion. Parents have complete control over how money in the account is invested and distributed while the child is still a minor. Because the money is considered a gift, however, once the child reaches adulthood, or the age of majority stipulated by your state, they take control of the assets and parents can no longer dictate how they are used.

Custodial accounts may be used to plan for expenses not covered by an ESA or a 529 plan – a car purchase or summer vacation - for example. They also may be a good option for high earners; unlike 529 plans they do not carry lifetime contribution limits. 

Educational IRAs, also called Coverdell Education Savings Accounts, function in much the same way as a Roth IRA. As with a 529 plan, you make after-tax contributions and all capital gains in the account accumulate tax-deferred. So long as the eventual withdrawals are used to finance higher education expenses such as tuition, fees, materials, room and board, or computers there is no tax liability.

Coverdell ESAs have more restrictions than 529 plans. The total annual contribution for a single beneficiary is capped at $2000, and may be further limited for high earners. Age limits also apply. The beneficiary must be 17 or younger to receive contributions and must make all withdrawals before turning 30.

Coverdell ESAs, though, do offer a couple of distinct advantages over 529 plans. The funds may be used to pay for private K-12 education and the fund managers are not chosen by the state offering the product. Because of this, there are typically many more investment options within a Coverdell ESA.

Trying to save for college can be daunting, but Rollins Financial Advisors has expert advisors who can help you map out a workable strategy to build up the assets you’ll need without overly burdening your family in the present.