Is it too Late to Start Saving in a 529 plan?
Kaleb Strawn | April 19, 2018
Growing up with three brothers, it was fairly easy to imagine the immense expenses associated with raising kids. Simple research will tell you that a family raising a child from birth to 18 years of age will ultimately result in expenses of greater than $230,000 (USA Today). While expenses decrease marginally when additional children come into consideration, the cost for my parents to raise four kids was astounding. But what is almost unfathomable, is that the aforementioned expense does not include the price of higher education. Add in the cost of four kids attending four-year universities and the result is enough to make you dizzy.
Fortunately for my brothers and me, my parents were financially able to put us through college. However, to my surprise, they never sought out participation in any college savings account, such as a 529 plan. Much like other families, my parents were too preoccupied with meeting the expenses of daily life to focus on a savings plan in the much too distant future. This is a common dilemma faced by young families as financing the cost of a home, child care and other miscellaneous expenses are issues that require their immediate financial resources.
I. What is a 529 plan?
529 plans are state sponsored savings accounts with tax benefits designed to encourage educational savings. Almost every state offers at least one 529 plan, with certain benefits of the plan left to the discretion of the state. Therefore, 529 plans can differ from state to state, accentuating the importance of researching the best plan for your particular situation. A common misunderstanding about 529 plans is that you must invest in the plan offered by the state in which you reside or the state of your child’s future university. In actuality, there are no restrictions to which 529 plan you choose. For example, a resident of Washington can invest in a 529 plan offered by New York to generate funds to attend a university in Texas.
Here at Avier Wealth Advisors, we recommend clients use the college savings plan that is most efficient for their particular situation. For instance, if a client lives in a state with no income tax, such as Washington, we recommend using a my529 plan (official college savings account of Utah). At the end of 2017, Morningstar rated my529 as one of the top four college savings plans in the United States as it offers a number of low cost mutual funds, including Dimensional Fund Advisors. Furthermore, my529 employs a unique age-based portfolio that allows investors to change their investment allocations as kids gets closer to college. This is important because as an investor nears the date of withdrawing funds, allocating investments into more conservative securities, is an integral component of preserving the safety and accessibility of your funds. On the other hand, if a client lives in a state with income tax, then it can sometimes be more tax advantageous to invest in the plan that is offered by their state. For example, if a client lives in Oregon, then contributing to Oregon’s state offered college savings plan allows for investors to receive a state income tax deduction.
II. When should I start investing in a 529 account?
It is never too early to start contributing to a college savings account. Ideally, one would start contributing to a 529 plan as soon as possible. Signing up for a plan when your child is born, or better yet, the years leading up to their birth, allows your contributions to compound for a longer period, exponentially increasing the size of your account. In addition, planning ahead mitigates the negative impact that market volatility can have on the return of your portfolio. A longer time horizon allows investors to take on more risk in their portfolio as investments have a greater ability to recover from market fluctuations.
III. Is it too late to start saving in a 529 account?
As the old adage goes, the best time to start was yesterday. The next best time is NOW. Even if your child is entering high school or will be attending college next year, the benefits of investing in a 529 plan can still be worthwhile. Saving in a 529 plan is a lucrative option for late investors because, as long as proceeds are used for qualified education expenses (tuition, room and board, books and supplies), earnings can be withdrawn free of federal tax, state tax and capital gains. This is better than alternative investment options, such as taxable accounts, as investments in these accounts are subject to expenses that will harm returns when removed from the account.
An important factor when contributing late to a 529 plan is to be “reasonable” about your investments. Allocating all your funds into equities in hopes of realizing massive gains in a short amount of time is unrealistic and extremely risky. Instead, your portfolio should consist of more stable investments, such as fixed income, which will ensure funds will be available to supplement your children’s education even in the case of large market fluctuations.
IV. How do I start?
Whether you want to get an early start on your child’s educational future or just recently found the funds to supplement your teenager’s college savings account, a 529 plan is an extremely useful tool to accumulate and preserve your investments. Here at Avier, we constantly emphasize the importance of education and made the company decision to provide 529 advisory services free of charge to existing clients. We look forward to discussing with you how a 529 plan can benefit you and your children. Feel free to drop us an email or stop by for a quick discussion.