Education Leads to Higher Life Satisfaction
A few months back, I wrote a blog post titled “Is College Worth the Cost?” This past week, the Gallup […]
Read More Education Leads to Higher Life SatisfactionA: No. Each account has a single owner and a single beneficiary.
A: Individuals can take advantage of the annual gift tax exclusion by contributing up to $15,000 ($30,000 for married couples) per beneficiary, per year as of 2018. A special rule applicable only to 529 plans allows an individual to accelerate up to five years’ worth of annual exclusions by contributing up to $75,000 ($150,000 for married couples) in one calendar year. The donor can only take advantage of this special rule by filing a federal gift tax return, IRS Form 709. Don’t be dissuaded by having to file a gift tax return, as they are pretty simple.
A: It’s hard to make a good case that a child’s death would create a financial hardship, and there are better savings strategies for children. One instance where buying a life insurance policy on a child makes sense is in a situation where the parents are dependent on their child for their livelihood (think Miley Cyrus or other child stars). But for the rest of the parental pool, life insurance can be an “OK” cash accumulation vehicle, but expect it to need 15-20 years to pay off. In general, you are better off putting the money into a moderate risk, global allocation mutual fund. To read more: Should You Buy Life Insurance for Your Kids?
A: You do not get a federal tax-deduction for contributing, although some states offer a state income tax deduction. Naturally, you must live in that state and invest in that state’s plan. Earnings in the plan grow tax-deferred and can be withdrawn tax-free (similar to a ROTH IRA) as long as they are used to pay for qualified higher education expenses, which include tuition, books, and certain other fees and expenses such as computer technology or Internet access.
A: 529 plans are investment accounts designed specifically for college savings. There are two major categories of 529 plans: Savings Plans and Prepaid Tuition plans.
Prepaid Tuition plans allow you to pay a fixed amount to a specific state institution now for a guarantee that your child’s tuition will be covered at that state institution when he or she attends it in the future. This plan may be a good deal. If tuition continues to increase at 8% a year, it is like having an investment with a guaranteed 8% return if your student ends up going to that institution.
College savings plans are much more commonly used because they are more flexible. The savings plans enable you to invest money to be used for the beneficiary’s qualified higher education expenses. Your money is typically invested in mutual funds offered by the plan, with no guarantee as to how much will be available when the beneficiary enters college. The savings plans allow you to use the account value at any Eligible Educational Institution, which includes most community colleges, public and private colleges and universities, and vocational schools.
A: That depends on who is the owner of the 529 account. The income and assets of the family are used to determine the Expected Family Contribution (EFC) when applying for financial aid. Twenty percent of assets in the student’s name (e.g., custodial accounts) are counted toward the EFC, only 5.6% of assets owned by the parent (e.g., 529 plan) are counted. Zero percent of any assets owned by a grandparent is considered in the EFC toward financial aid. Therefore, there can be an advantage in terms of qualifying for student loans by having a grandparent as the owner of your student’s 529 plan. However, distributions from a grandparent owned 529 plan will significantly reduce financial aid qualification. Read about all the details and potential workarounds HERE.
Keep in mind that most need-based financial aid is simply a student loan. So, money saved for college through 529 plans will reduce the amount of debt your student eventually needs to pay back.
A: You can start as early as age five with simple concepts like counting coins and letting your child give the money to the cashier. You should give kids an allowance and teach them about saving vs. spending starting around ages 6-8. Also, read: Money Tips: Teach Your Children About Money.
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