THE SMART WAY TO SAVE
Ultimately, you should weigh the tax breaks available to invest in your state’s 529 plan against the investments offered and expense fees. You can view plans state by state by clicking here. Will it hurt eligibility for financial aid? Somewhat... Yes, at least a little bit. Any 529 plans owned by college students or their parents will reduce need-based aid by a maximum of 5.64% of the account value. So if you have $10,000 in a 529 plan, withdrawn by $2,500 each year, it will reduce aid by roughly $560 the first year, $420 the second year, $280 the third year, and $140 the fourth year – for a total of $1,400. If you’re a grandparent, your 529 plan isn’t included on your grandchild’s Free Application for Federal Student Aid (FAFSA). However, distributions from the plan are reported as untaxed income to the beneficiary on the FAFSA. In this case, a $10,000 account balance withdrawn by $2,500 per year would result in about a $500 annual reduction of need-based aid for the second, third, and fourth years – a total of $1,500. The numbers can get tricky, but there are solutions... For example, you could simply wait for a student’s senior year of college to take a distribution, because it does not affect aid eligibility for the current award year, only for the subsequent award year. And sometimes it might be worthwhile to take the 10% non-
Who is in control of the money? You are...
When you contribute to a 529 plan for a family member, you remain in charge of the money. That allows you to use the money solely for its intended purpose... and you can change beneficiaries at any time, for any reason – just as long as the funds are used for education. Do you have to use the plan from the state you live in? Nope... You can open and contribute to any state’s plan. And this competition is a good thing... States continually improve their fund offerings and lower their expense ratios. Here are the four “gold” plans that Morningstar ranked the highest for 2017: Illinois’ Bright Start College Savings Program, the Virginia Invest529 plan, Nevada’s Vanguard 529 College Savings Plan, and the Utah Educational Savings Plan. All these plans offer super-low-fee, passive index funds, and also have age-targeted asset- allocation funds that gradually reduce their stock stakes each quarter, so that your risk goes down as you get closer to your goal. In addition, several state 529 plans offer grants to win your business... like dollar-for- dollar matching or even free money (if you’re born in Maine) just for opening an account. So compare the details before choosing a plan. And there’s nothing stopping you from having plans in multiple states... You can be a resident of Maryland, invest in a Nevada 529 plan, and send your grandchild to the University of Minnesota (go Golden Gophers!).
You can be a resident of Maryland, invest in a Nevada 529 plan, and send your grandchild to the University of Minnesota (go Golden Gophers!).
20 May 2018
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