Utilizing a 529 savings plan may be an effective tool to build a tuition nest egg, even if college is fast approaching for your child.
Like any parent with pre-college-aged children, you’ve likely been exposed to repeated messages about the importance of setting money aside to help your kids afford higher education. This is not surprising when you consider the 2022-2023 average annual cost for tuition, fees, room and board at a four-year private college was $57,570 according to the College Board.
Paying for higher education is a prominent financial issue for many families, which is why starting early and saving regularly can help give you additional leverage to grow assets and offset some of the financial burden. And utilizing a tax-advantaged 529 savings plan—even if that means starting one just a few years before your kids graduate from high school—may be an effective tool to build a college nest egg.
529 plans allow you to set funds aside for the express purpose of helping to cover education costs. Contributors can choose from a variety of plans and invest the money in different ways, giving 529s a broad appeal. Some key benefits of 529 plans include:
If your child (or children) is approaching college age, you may wonder if it is too late to start contributing to a 529 plan.
“Just because you haven’t started saving in a 529 to this point doesn’t mean you should forego the valuable benefits,” says Angie O’Leary, head of Wealth Planning at RBC Wealth Management–U.S. The earlier you set funds aside to help cover education costs of a future collegian, the greater the opportunity to build a significant pool of assets, she says.
For example, consider what happens when parents start saving right after their child is born.
You may have to follow a more conservative investment path with a 529 plan if college is fast approaching for your child. Still, it’s likely to be worthwhile, according to O’Leary. “If your kid has just started college and you haven’t opened a 529, even getting two or three years of potentially tax-free growth in the account can be helpful,” she says.
“Engage your village,” she adds. “Forgoing material gifts and inviting others to contribute to the fund is a great way for extended family and friends to show the value of a higher education.” This can include family members—such as grandparents, aunts and uncles of the beneficiary—who by gifting can turn those dollars into tax-advantaged contributions. Depending on what state they live in, it’s possible these contributors may be able to claim a deduction on their own state tax return.
If you have a pool of money sitting in a taxable savings or investment account, it may also be used to fund a 529 plan. One option, if you hold assets that are subject to capital gains taxes when sold, is to gift those assets to a child who’s likely to be in a lower tax bracket. The child can then sell the assets at a lower capital gains tax rate (possibly even qualifying for a zero percent rate) and put the proceeds into a 529 plan (as long as the child is age 18 or older).
Even if you start saving late, a 529 may have longer-term benefits you didn’t initially anticipate. For example, rather than using accumulated assets to help defray education expenses for your own children, the money may instead be allowed to accumulate and be applied toward college expenses far into the future. For example, O’Leary says, if a child decides to pursue a graduate degree, that can extend the potential time horizon for the funds in the 529 plan to grow.
O’Leary points out the flexibility of 529 plans may also allow you to think beyond just the immediate potential needs for college. The scope of these plans expanded with the 2017 Tax Cut and Jobs Act as well as the 2022 SECURE 2.0 Act. Today, funds accumulated in 529 plans may also be used for elementary and high school education expenses, and in certain situations leftover funds can be rolled over to a Roth IRA as long as the account is owned by the beneficiary of the 529 plan.
“Set aside as much as you can afford now and let that money grow over a much longer timeframe,” says O’Leary. “Ultimately, assets accumulated in the account could even be used to help fund education costs for your grandchildren.”
Quite simply, according to O’Leary, don’t discount the possibility that, while you may be late in saving for the current generation, you can get a head start on the next generation’s education expenses.
RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in consultation with your independent tax or legal advisor.
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.
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