It is that time of year again where school years are coming to a close and many parents are gearing up for a bitter-sweet high school graduation or are celebrating their child being one year closer to a hard-earned college diploma. Whatever the case may be, it is hard to deny the heavy lift education costs can be. You may not be able to shrink the bottom-line cost of attendance any further, and you surely can’t impact how fast many costs are going up, but, you can reduce the weight this line-item carries within your financial plan by remembering these 5 things:
1. You planned and saved well into a 529 plan, USE IT!
• A simple rule of thumb is that if the expense is required by the institution for enrollment or participation in a class, it is going to be a qualified expense (generally speaking) which can be paid from the 529 plan tax and penalty free.
• If the expense is non-qualified, don’t be afraid to use the plan if you have to. You will incur taxes and a 10% penalty, but only on the earnings. That said, a potentially better source for non-qualified expenses may be earmarking some funds within a taxable brokerage account for education. Investing a portion of funds you are saving for college in a brokerage account means you forego some tax savings, but this approach may afford you flexibility down the road if those earmarked assets are never used for education.
2. Potentially plan around a scholarship, fellowship, or grant money if it’s available.
• One of the most common questions I hear is, “What happens if I save into a 529 plan but my child is offered a scholarship?” There are several exceptions to the 10% penalty rule on 529 plans, and this is one of those exceptions. You are able to take a non-qualified withdrawal up to the amount of your child’s tax-free scholarship without penalty. You will still incur income taxes on the distribution, but it effectively releases those funds from the few constraints of a 529 plan for the sake of your own flexibility.
3. The 529 plan can now be used for more than just college.
• The Tax Cuts and Jobs Act of 2017 now allows 529 distributions of up to $10,000 per calendar year for private elementary or secondary school qualified expenses without incurring federal income taxes or penalties.
• Note: Not all states have conformed to the new law; distributions for elementary or secondary school expenses may still be taxable at the state level.
4. You can roll 529 plan money to other qualified beneficiaries if/when needed
• 529 plans offer the unique ability to hold the funds in a beneficiary’s name for quite a long time. So if grad-school becomes a reality, the money is there for use. If not, the funds can be rolled to an “eligible member of the family” (and this is a fairly robust, flexible listing of people to include the spouse of the beneficiary or, yes, a grandchild down the road).
5. Consider using a Roth IRA for college expenses.
• If all other sources of education funding have been utilized, the Roth IRA may be a great vehicle to consider. Why? Because Roth distributions are viewed first as a return of contributions and then earnings, and you can always take out your Roth contributions tax-free.
• If the distribution is to pay for qualified higher education expenses, AND the Roth has been established for 5+ years, the 10% penalty is eliminated in most cases which makes the Roth IRA a very tax efficient funding candidate when planning for college expenses.
Planning for college can be overwhelming, both financially and emotionally, but by working with a trusted advisor to utilize the strategies above, you can substantially lighten the burden. Should you have any follow up questions, or if you would like a double-check on your funding plan for education, please give the team at Atlanta Financial a call.