In advising parents and grandparents over the years on funding their future college student’s tuition, this question is a common one. To the point, one must take a comprehensive look at all the revenue sources (present and potential) earmarked to support education to determine the priority of which should be spent and when.
The Internal Revenue Service offers up a cut and dry Q & A about 529 Plans, but does not include the nuances of how to work several different fund sources to your best (and permissible) advantage.
For a recap of the prevailing advantages of a Florida 529 plan:
- Earnings are tax-free when used for qualified higher education expenses.
- No minimum contribution is required to open an account, and on-going contributions can be any amount, and with a frequency you determine.
- The risk magnitude is dependent on the investment options selected.
- Ability to use the money for colleges across the nation.
- Funding may be allocated for room and board (with a few potential stipulations).
- Unlike the Florida PrePaid plan where the money must be spent within ten years of the student’s projected enrollment, there is no set time period with the 529.
- There are no minimums to open the plan and contribution amounts and frequency can vary.
That being said, to answer the question about when to use 529 money, if your child has taxable college savings accounts besides the 529 Plan, you may want to use these taxable accounts first for college expenses.
Reason being, the taxable account will probably reduce your child’s financial aid eligibility. While these are viable savings products, they don’t do you as much good if they hinder other opportunities. This is the same concept as putting a 529 Plan in your name instead of in your child’s name. Because the awarding of many programs is predicated on need, assets in his or her name could ultimately cost them from being granted those monies.
Further to that point, due to the nature of the 529 Plan, if there are no immediate withdrawals, it can continue to earn tax-free, versus the taxable account that costs you more overall.
Besides, as we’ve covered in previous posts, this plan can have a lifetime that extends beyond graduation and can be rolled into a family’s estate-planning strategy. Future generations can let the money compound, making this fund a family asset, to protect future generations or currently retired family members on fixed incomes who wouldn’t necessarily be disadvantaged by paying a 10% penalty and reporting the income.
The offset to this strategy of using the taxable money first is that it has much more flexibility. By literally letting your money work for you, peace of mind and a well-planned college funding plan are yours for the spending.
If you would like help choosing and investing in a 529 or College PrePaid Plan, please contact me at email@example.com or (813) 282-7870. While we believe a college education is important, we also understand it is expensive, and the process is daunting.
We do not charge fees for helping with 529 Plan accounts. We get two benefits from helping you: 1) as parents ourselves, we feel good about setting you and your child on the correct path to pay for college and 2) it enables us the opportunity to begin a discussion about your other investment needs.
If you have a question beyond the scope of this article, feel free to visit our “Ask Us a Question” page or leave a comment below so we may assist you with your specific situation.