Can Helping Your Kids Hurt?

I recently saw a Pew Research study on financial independence among young adults. The study found six in ten parents of people aged 18 to 29 had provided at least some financial help to their children. In many cases the support was for regular monthly bills like groceries, rent or car insurance.

Of course if your young person is not working, they may need that support. But how long is it reasonable to continue to support your kids if they are not actively seeking an education and are working full time. It’s a question every parent has to answer for themselves. But it is important to understand whether you are setting your kids up for financial failure.

In one of my favorite books, The Millionaire Next Door, Thomas J. Stanley and William D. Danko, contend that it’s easy for a financial boost for your kids to become financial enabling. The support you provide increases their ability to spend on things they otherwise could not afford. With high rents and big student loan bills, life can be financially difficult for those just starting out, and it can be hard to know where to draw the line.

I did not draw the line in the right place. Last May, I wrote about how my daughter financially crashed and burned in How to Go From Happy to Desperate in Six Weeks or Less. Following the crash, to help her get back on her feet, she was living with us. Her budget was meant to be similar to what she would have to pay if she were living on her own with a roommate in our area. She gave us money for her non-discretionary expenses, like rent, utilities, groceries, car insurance, etc. We put it in savings for her. What was left had to cover everything else.

Except her medical costs. She doesn’t make much money. She has a government job with great health benefits but pretty low pay. I didn’t want her to skip getting the care she needed because she couldn’t afford her out-of-pocket expenses. So we agreed that we would pay for her medical expenses, and she didn’t need to include those in her budget.

Toward the end of that year, she had some tests done, and the medical bills came to around $500. No big deal for us, and we were happy she was getting help. She was actually doing really well with her budget. She was covering her “pretend” bills, and saving money beyond the money she was giving us. She had really embraced the idea of assigning a job for every dollar she had.

The problem was, she was assigning money that should have been earmarked for medical expenses, had we not been paying them, to pay for a tatoo. While we laid out $500 for her medical bills, she spent $500 on said tatoo. It was totally my fault. She had saved for it. She didn’t have to spend the money on anything else. But it bugged the heck out of me.

We made it possible for her to pay for a tatoo, because we were paying for an expense that was legitimately a part of her cost of living. And that is where the flaw in providing support to your kids lies. It masks their true cost of living, and as a result, they make decisions based on the inaccurate picture.

I want Kaye to understand her cost of living. She will make long ranging decisions such as where to live, whether to go back to school or change careers based on what she thinks she can afford, and I want her to make those decisions with all the clear-eyed facts.

Today, Kaye covers all of her expenses on her own. She includes saving for out-of-pocket medical costs in her monthly budget. Similarly she sets aside money for car maintenance and repairs. Of course we will help if something big and devastating comes up. But she is fully living within her means and saving for her needs as well as her wants – including her next tatoo.


Photo by Cory Woodward on Unsplash

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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

Saving for College: 529 vs IRA

Recently I saw a recommendation that you should put your college savings into a Roth IRA instead of a College 529 plan because the Roth savings would not be included in parental assets for assessing whether your child would be eligible for financial aid. This, however, is not as straight forward as it might seem. There are trade offs that mean the real answer is it depends, and in these cases, I like to do the math.

First the rules. With both a 529 plan and a Roth IRA, your investment earnings grow tax-free while in the account. With the 529 plan, withdrawals for qualified educational expenses are tax-free as well. With the Roth, you can withdraw contributions tax-free, but the earnings will be taxed at your regular income tax rate. Roth withdrawals for educational purposes do not incur the 10 percent penalty for early withdrawal.

The 529 plans in thirty seven states allow you to deduct your contributions from your state income taxes up to a limit. In Oregon, for example, you can deduct $2,435 if you are single and $4,865 if you are married. However, you are limited to the investment options available in your state’s plan. If you don’t like those, or your state does not offer a 529, you can save for college in any other state’s plan, but you won’t get the tax deduction. Earnings still grow tax-free and are not taxed on withdrawal for education.

The argument in favor of using a Roth IRA is that retirement savings are not counted in your assets on the Free Application for Federal Student Aid (FAFSA). Therefore, in theory, your child would be eligible for more financial aid if you saved in a Roth instead of a 529 plan. However, the earnings on your savings will be taxed and you won’t get the state tax deduction for your contributions (if it’s available to you), so you will have less total savings available for college given the same annual savings amount.

Now for the math. Given the tax implications of saving in a Roth, are you really better off than if you saved in a 529 plan? The answer depends on how much savings you have outside of retirement plans. Your expected family contribution (EFC) based on your savings alone (there is also an income test) will be 5.64% of your family assets per year. Your home, retirement savings and an allowance for emergency savings are excluded from the calculation. The allowance for emergency savings is based on the average cost of living for a family of your size. It usually ranges between $25,000 and $35,000.

The following table shows how the two options compare when your child is about to enter college, assuming you save $2,400 per year from the time your child is born until they are eighteen. It also assumes you have $100,000 in savings outside retirement plans at that time. I’ve assumed federal and state taxes combined are 30 percent, and that 529 contributions get a state tax deduction of 9 percent, based on Oregon’s tax rate. College savings also earn 4 percent per year in investment returns.

529 PlanRoth IRA
Taxable Savings100,000100,000
College Savings After Taxes$64,825$54,691
Family Exclusion$30,000$30,000
EFC per Year$7,604$3,948
Additional Potential Financial Aid$3,656
Additional College Savings$10,135

In this example, for the same annual savings rate, you would be better off saving for college in the 529 plan. Between the tax exempt withdrawal and the tax deduction for contributions, which I’ve added to college savings, you would have nearly $6,500 more available for college (the difference between the additional college savings and the additional financial aid) than if you saved in a Roth IRA. The 529 advantage declines with more in taxable savings. Given my assumptions, the break even level of taxable savings is $215,000.

There is one other reason you might consider using a Roth IRA as a college savings vehicle. If your child does not go to college, the Roth IRA can stay invested, and you can use it for your own retirement, with withdrawals being completely tax-free after age 59 1/2. With the 529 option, if the funds are not used for education purposes, the earnings will be taxed at your income tax rate plus a 10 percent penalty. However, you can transfer the savings to another child, or use them for your own continued education tax-free. A variety of vocational classes as well as college classes are eligible educational expenses.

If the funds are not used for education, you will have $2,200 more savings in your Roth IRA, than if you withdrew the 529 plan money and paid the taxes when your child is eighteen. The Roth would continue to grow tax-free until retirement. Alternatively, your 529 plan money could stay in taxable savings for retirement. In twenty years, the IRA option would have $6,500 more in it if your investments earned an average annual return of 7 percent and your tax rate remained at 30 percent.

As you can see, it’s not a straight forward answer of one or the other. If your child does go to college, the 529 plan offers serious tax benefits, especially if you live in a state that offers a tax deduction for 529 contributions. But if you have substantial taxable savings, or you ultimately don’t have any educational expenses, the Roth IRA could be a better option.

You certainly cannot know what the future holds for your child, so there is no wrong answer here. The important piece of the equation is that you are saving for her education in the first place. Whether you save in a 529 plan or an IRA is a secondary consideration. So save away, and don’t worry too much about whether you have the right type of account.


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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

How to Help Your Kids Understand Money

Recently I had an opportunity to speak with a class at Pacific University, in Forest Grove, Oregon. We covered a variety of personal finance topics. I’ve done this before, and I’m always struck by the fact that young people are largely unprepared to live in the world of personal finance.

There are many reasons for this. It’s not taught in schools. Often parents themselves don’t understand the concepts. When quizzed about basic financial literacy topics, most Americans only score about a C minus. But a big obstacle is interest.

When talking with kids, or anyone, about money, you have to meet them where they are. The topic has to match not only their skill, but their interest. As with most skills, if the topic is not currently relevant, it is too abstract. Here is what I’ve learned from the literature and my own experience:

Elementary School Kids

Once kids are in the third grade, they have enough math skills to do a bit of money management. Your kids should have some money available to manage on their own, whether it’s from doing chores or an allowance. Have them save up for the things they want that are not necessary to everyday life. Help them understand the process for saving. How much money will they put aside each week? What are they willing to do for the thing they want, such as extra chores or giving up other ways they spend their money?

It’s important that kids truly have a choice. This is one area where I routinely got it wrong with my own kid. I remember vividly the day she wanted to spend $5 for a pony ride. I lectured her about how many weeks of allowance it took her to save $5 (though she wasn’t saving for anything in particular) and how short the ride was going to be. I should have just let her get on the pony.

Older elementary school children have the ability to understand the concept of debt. While I don’t encourage taking on debt for things you can reasonably get by saving ahead, it’s not a bad idea to let your kids have the experience of owing you money.

If they have something large on their wish list, consider letting them borrow the money from you to be paid in installments over a time you choose. Make a contract with them that clearly states what they will pay each week and how long it will take to pay you back. Talk to them about how they will raise the money for the payments.

Middle School Kids

Middle school kids can start to learn more about creating a budget. You can give them control over some of their needs as well as their wants. Give them a reasonable budget for things like their school clothes and supplies, and let them make their own choices about how to use it. Show them alternates to their choices, but let them make their own and live with them.

They can also understand the cost of living. Consider having your kids participate in paying the bills with you and making some family decisions. For example they could help plan a vacation, making choices that fit in your budget. Or you can work together to save for something the whole family can enjoy, like a new television.

High School Kids

In high school, you can add in activities that involve more complex financial concepts, but you are losing their interest. From here on out, you need to focus on things in which they will have a personal stake. College is a good one. Most parents have not saved enough to cover the full cost of college. Kids need to understand where the money is going to come from.

Make your family situation clear to them, and explain how they can help themselves. Good grades and extra curricular activities can result in scholarship money. After school and summer jobs can help them pay for books and room and board. And most importantly, their choice of schools will have a huge impact on how much money your family has to come up with.

If debt is going to be part of the picture, estimate their monthly payments now. It will help them understand the impact of the choices they make. You can estimate payments for different loan amounts at StudentAid.gov, and you can find more resources to help your child understand their options at the same site on this page.

College Age

College students are living on their own to some degree, and it’s a great time for them to begin to understand how the world works. College students should begin to pay some of their own bills. Likely candidates are cell phone bills and car insurance. If they are not living in the dorms, have them manage rent and utility payments and groceries, even if you are providing the funding.

When your child starts looking for work, with or without college, help them understand company benefits. Even some internships offer health insurance and an opportunity to participate in retirement plans. Help them understand how these benefits work and why they should participate. It’s also important to talk to them about building an emergency fund. How much they need, how they will save it, and why it’s important should all be understood.

It’s hard to get young people to begin thinking about retirement, but if they start participating in their company retirement plan early, it will reduce the amount of money they need to save out of their paychecks for the rest of their lives. I’ve found illustrating how a company matching contribution works is miraculous in getting these newly minted workers to participate. Here is a simple example you can use:

  • Your young person contributes $100
  • Since the contribution is before tax, only $80 comes out of their pay
  • Their company matches their contribution with $100
  • They have saved $200, and only $80 has come out of their pay.

Talking to kids about money is hard. You want to protect them from the cold world realities as long as possible, and as a culture, we’re just not good at talking about money period. The hard part is even if you do everything right, which you won’t, sometimes they just don’t listen. I wrote about how my own efforts didn’t help my daughter avoid going into the financial ditch in this post. But keep in mind, every lesson you teach stays in their heads somewhere. They’ll remember when the time comes.


Photo by Sharon McCutcheon on Unsplash

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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

The #1 Tool For Getting Help Paying for College

March is nearly here, and the end of the school year is in sight. If you have a high school senior at home, that means you have just a few short months to figure out how you’re going to pay for college.

A little more than half of parents of eighteen year-olds have saved for college. The average savings for those who have it is $28,000, about enough to cover the full cost of one year at a public university. Most students will turn to debt to pay for at least some of their education.

Debt among eighteen to twenty-nine year-olds is at a ten year high, thanks mostly to growing student loan debt. Yet many students are missing out on valuable financial aid because they failed to file the Free Application for Federal Student Aid, or FAFSA.

About a third of students who don’t file the FAFSA are eligible for Federal Pell grants, which is financial aid that doesn’t have to be paid back. Of those who would have qualified for the grant, half could have gotten the maximum amount, which was over $6,000 for the 2018-2019 school year.

Nearly half of private student loan borrowers could have qualified for lower cost federal loans had they filed the FAFSA. And the FAFSA isn’t just for federal aid. State and college financial aid programs and many private scholarships rely on information from the FAFSA.

The biggest reason sited for not submitting the FAFSA was that families thought they weren’t eligible for aid. Some form of financial aid is available to anyone with an annual household income of $250,000 or less. Only about 5 percent of American families don’t qualify for any form of financial aid.

And financial aid is available beyond traditional four year institutions. If you have your eye on a community college or certificate program you may still be eligible for financial aid.

Timing is important. Some forms of aid are granted to the eligible that apply first, and when the money is gone, it isn’t available again until the next school year. Some grants and scholarships have early deadlines. But if you haven’t filed your FAFSA yet it isn’t too late. There are still options open.

Applying for financial aid can seem daunting. The FAFSA asks for a lot of information. Often you’ll need to fill out supplementary forms for financial aid or scholarships beyond the aid available from the Federal government. You might think it isn’t worth it.

But if you think in terms of your hourly rate to apply, it might seem more worthwhile. Say you find an opportunity for $1,000 in government or private aid or scholarships. If you put in four hours of work to get it, that’s an hourly rate of $250. Most don’t make that in their professional jobs.

College is too expensive to assume you can’t get some help with it. Fill out the FAFSA annually. If it’s too late to get some forms of aid for this fall, you may still qualify in the following year. Most don’t have the luxury of fully paying for their children’s education, but help is available if you file the form.

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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

Give the Gift of Education for Christmas

From the archives: Here is an article to help reduce the stress of Christmas and bolster your college savings all at once.

The holidays are upon us. I’ve always thought Christmas was mostly about the kids. There is nothing better than seeing a little face light up at the decorations or the absolute glee in your child when she receives that one thing she wanted most of all. But all the gifts can get out of hand.

With grandparents and aunts and uncles all giving to your children, your kids could be on overload before breakfast Christmas morning. If your kids’ eyes are glazed over before they’re done opening all their presents, consider a different tactic that can cut down on the volume of gifts and help with your children’s future. Ask your relatives to make a contribution to a College 529 plan instead of buying the usual gifts that may be forgotten in a corner before long.

A College 529 plan is a tax advantaged savings program for post high school educational expenses. And now, some states allow you to use the money for K-12 private school tuition. Investment earnings grow tax free and withdrawals for educational purposes are tax exempt.

An AARP survey found that 36 percent of grandparents believe it is their job to spoil their grandchildren by buying them lots of stuff, mostly at the holidays. Of grandparents surveyed, 25 percent will spend more than $1,000 in a year on their grandchildren, and 40 percent will spend more than $500.

Those amounts can add up to substantial college savings by the time your children are ready for school. If your children were to receive a total of $500 in gifts each holiday season from their relatives beginning when they are babies, a 529 plan could grow to well over $14,000 by the time they are 18, assuming a 5.0 percent annual return. Smaller amounts also help. Some 529 plans accept deposits on existing accounts as low as $15.

The gift giver benefits as well. Contributions to a 529 plan in 34 states are state tax deductible, and in two thirds of those states, you don’t need to be the owner of the account to get the deduction. In Oregon, for example, a single person can deduct up to $2,300 of their contribution, and a married couple can deduct up to $4,600. If a larger gift is made, the extra over the deductible limit can be deducted in future years.

For the states where you do need to be the owner to get a deduction, the gifter would open their own account and simply name the child as the beneficiary. There is no limit to the number of accounts that can be opened for a single beneficiary.

For the 16 states that don’t offer a 529 plan, an account can be opened in any other state’s plan. While contributions are not deductible, the investment earnings will still grow tax free. There is no obligation to attend school in the state where the account is opened. Savings in 529 plans can be used for educational expenses at a wide variety of schools nationwide.

There are no limits to annual contributions for 529 plans. Gifts greater than $14,000, which is the gift tax exclusion amount, require the filing of a gift tax return. However that does not mean the gift will be taxable. It can remain tax exempt under the lifetime exclusion for estate taxes, currently at $5.49 million per individual for federal tax purposes. The maximum lifetime 529 plan contribution limit is $300,000

If your child doesn’t attend school, the money can continue to grow tax free in case they change their mind later. The money can remain in the plan as long as there is a living beneficiary, and you can change the beneficiary if school isn’t in the cards for the first one.

If the money is not used for educational purposes, you will pay income tax and a 10 percent penalty on the earnings. While that sounds terrible, if you’ve had the money invested for a while, chances are your earnings will have grown, and you will still come out ahead.

Instead of your parents buying gifts that won’t last or will be set aside to gather dust, have them invest in your child’s future. Toys wear out. Clothes are outgrown. Electronics become obsolete in no time. Most kids can only take so much unwrapping on Christmas. A College 529 plan contribution is a gift that will have a lasting impact, and have your child remembering Grandma and Grandpa’s gift all their life.

Photo by Thought Catalog on Unsplash

Why Life Insurance is Not a Good Way to Save for College

Recently a friend asked me about a strategy proposed to her by a financial adviser. The adviser was recommending that she and her husband invest their children’s college savings in a life insurance policy. Here were the benefits as given by the adviser:

  • The money grows risk free.
  • It is life insurance the children can keep for the rest of their lives.
  • The money isn’t counted as family assets for financial aid purposes.

On the surface these seem like good ideas. Saving for college in a life insurance policy has been a strategy promoted for ages. In fact, Gerber Life has promoted these policies on national TV for years. However, life insurance is probably the least effective way to save for college there is. If someone recommends a life insurance policy for your college savings, run.

The policies promoted are known as permanent or whole life policies. As long as you pay the premium you will have life insurance for as long as you live and a guaranteed death benefit when you die. A portion of your premium pays for the death benefit and a portion earns interest which builds up a cash value. Over many years, the cash value grows, and it and the death benefit become one and the same.

The money does grow risk free at a low interest rate. The cash value will not decline, unless you withdraw it or stop paying the premiums, and it will grow slowly over time. However, there are many college savings options that offer a  greater return and much lower expenses. The death benefit is a big expense that cuts into your college savings, as does the hefty commission the adviser earns for selling you the policy.

Many state 529 plans offer age based investment options that gear their investment strategy to the remaining time until your child starts college. Though not guaranteed, these options offer sound strategies that can more efficiently grow your college savings.

As a permanent life insurance policy, your children can keep the policy at the same premium rate for their lifetimes. However, to withdraw the cash value to pay for college, they will either need to take a withdrawal, which is a taxable event, or borrow from the policy. Any amount you withdraw or borrow reduces the death benefit, and withdrawals can be subject to a fee called a surrender charge.

Children don’t need life insurance. You only need life insurance if there is someone depending on your income, and that is not the case for anyone until they have a spouse or children of their own. Your children can buy their own, much cheaper, term life policy when they get married.

Life insurance is not included in family assets for purposes of determining eligibility for financial aid, whereas money saved in a 529, or other college savings plan is. However, the first $20,000 in savings is exempt from the Expected Family Contribution (EFC) and the EFC is capped at 5.64 percent of parental assets. You can save quite a bit before your child’s eligibility for financial aid is impacted.

When your children are young, it is important for you to have life insurance on yourself. You’ll want your children to have all the advantages you would have provided if something happens to you. However your children don’t need their own life insurance, and it is an expensive and inefficient way to save for college. If you have money to put toward your children’s education, check out your state’s 529 college savings plan instead.

Photo by Colin Maynard on Unsplash

Give the Gift of Education: College 529 Plans

The holidays are upon us. I’ve always thought Christmas was mostly about the kids. There is nothing better than seeing a little face light up at the decorations or the absolute glee in your child when she receives that one thing she wanted most of all. But all the gifts can get out of hand.

With grandparents and aunts and uncles all giving to your children, your kids could be on overload before breakfast Christmas morning. If your kids’ eyes are glazed over before they’re done opening all their presents, consider a different tactic that can cut down on the volume of gifts and help with your children’s future. Ask your relatives to make a contribution to a College 529 plan instead of buying the usual gifts that may be forgotten in a corner before long.

A College 529 plan is a tax advantaged savings program for post high school educational expenses. Investment earnings grow tax free and withdrawals for educational purposes are tax exempt.

An AARP survey found that 36 percent of grandparents believe it is their job to spoil their grandchildren by buying them lots of stuff, mostly at the holidays. Of grandparents surveyed, 25 percent will spend more than $1,000 in a year on their grandchildren, and 40 percent will spend more than $500.

Those amounts can add up to substantial college savings by the time your children are ready for school. If your children were to receive a total of $500 in gifts each holiday season from their relatives beginning when they are babies, a 529 plan could grow to well over $14,000 by the time they are 18, assuming a 5.0 percent annual return. Smaller amounts also help. Some 529 plans accept deposits on existing accounts as low as $15.

The gift giver benefits as well. Contributions to a 529 plan in 34 states are state tax deductible, and in two thirds of those states, you don’t need to be the owner of the account to get the deduction. In Oregon, for example, a single person can deduct up to $2,300 of their contribution, and a married couple can deduct up to $4,600. If a larger gift is made, the extra over the deductible limit can be deducted in future years.

For the states where you do need to be the owner to get a deduction, the gifter would open their own account and simply name the child as the beneficiary. There is no limit to the number of accounts that can be opened for a single beneficiary.

For the 16 states that don’t offer a 529 plan, an account can be opened in any other state’s plan. While contributions are not deductible, the investment earnings will still grow tax free. There is no obligation to attend school in the state where the account is opened. Savings in 529 plans can be used for educational expenses at a wide variety of schools nationwide.

There are no limits to annual contributions for 529 plans. Gifts greater than $14,000, which is the gift tax exclusion amount, require the filing of a gift tax return. However that does not mean the gift will be taxable. It can remain tax exempt under the lifetime exclusion for estate taxes, currently at $5.49 million per individual for federal tax purposes. The maximum lifetime 529 plan contribution limit is $300,000

If your child doesn’t attend school, the money can continue to grow tax free in case they change their mind later. The money can remain in the plan as long as there is a living beneficiary, and you can change the beneficiary if school isn’t in the cards for the first one.

If the money is not used for educational purposes, you will pay income tax and a 10 percent penalty on the earnings. While that sounds terrible, if you’ve had the money invested for a while, chances are your earnings will have grown, and you will still come out ahead.

Instead of your parents buying gifts that won’t last or will be set aside to gather dust, have them invest in your child’s future. Toys wear out. Clothes are outgrown. Electronics become obsolete in no time. Most kids can only take so much unwrapping on Christmas. A College 529 plan contribution is a gift that will have a lasting impact, and have your child remembering Grandma and Grandpa’s gift all their life.

Image courtesy of rakratchada torsap at FreeDigitalPhotos.net

529 Plans – A Great Way to Save for Education

There seems to be a lot of confusion regarding 529 plans, the program for college savings. As a result many families don’t take advantage of them. Yet 529 plans are a great way to save for college. They are widely available, provide tax advantages and are more flexible than you may think.

There are 108 unique 529 plans available across the country. At the end of 2016, there was more than $275 billion invested in them. Yet many families aren’t taking advantage of the benefits this savings option offers. Only about 2.5 percent of families owned 529 accounts at the end of 2013, according to the Federal Reserve.

A 529 plan is a tax advantaged way to save for college. Regardless of whether your state offers one, you can save for college in a 529 plan, and all the earnings on your investments accumulate tax free. Qualified distributions are also tax free. The tax savings on the earnings alone are worth a lot.

Suppose you save $100 per month starting when your child is born until she goes off to college. If your account earns 6.0 percent per year and your combined state and federal income tax rate is 35.0 percent, saving in a 529 plan will allow it to grow by an extra $7,400 relative to a regular taxable savings account earning the same. If your state does offer a plan, they also may offer tax incentives to contribute to it. Contributions may qualify to be deducted from your income for state tax purposes, making saving for college a little easier.

Anyone can invest in any state’s 529 college savings plan. You can find an annual ranking of 529 plans online from Morningstar. SavingforCollege.com also offers a ranking, though they use different criteria. If your state offers a plan, the tax benefits on the contributions may make it worthwhile to invest in your own state’s plan, even if it isn’t top rated.

Worried that the money saved in a 529 plan is only eligible to be used at the public universities in your state? While there are plans that allow you to save specifically for your state’s schools, called prepaid tuition plans, there are only 20 of them across the country.

The vast majority of plans will allow you to withdraw the money tax free to pay for expenses at virtually all accredited public, nonprofit, and for profit post secondary institutions any where in the country. It doesn’t matter if the school is a college, university or vocational school. Here in Oregon, 529 plan savings from any plan can be used for everything from the University of Oregon and Oregon State to Le Cordon Bleu College of Culinary Arts and a wide variety of programs in between.

What if your child doesn’t wind up going beyond their high school education? First you never know what your child will do in the future. There are no limits to how long money can stay in a 529 plan, as long as the beneficiary is living. If your child doesn’t go to school right away, they may down the line. If that doesn’t happen, the beneficiary of the account can be changed to anyone in your family out to first cousins of the original beneficiary. That means the money could be used for your own education, your siblings or their children’s education. Even your parent’s can use it if they have a desire to go back to school.

If there is absolutely no one in the family that can take advantage of the money, it is still yours. It can be withdrawn at any time. Withdrawals that are not made for qualified educational expenses will be taxed with an additional ten percent penalty. This is what get’s people concerned about saving in a 529 plan. But it’s not as bad as it sounds.

In the example above, total earnings on the account are $15,500. This is the amount on which the taxes owed will be calculated. Assuming the same 35.0 percent combined tax rate, the taxes due would be $5,425 plus an additional penalty of $1,550, or total taxes of $6,975. You would also have to repay any state tax benefits you received on the contributions.

This is not the end of the world. You get all of your contributions back, and the taxes you wind up paying are still less than the additional benefit you gained by growing your savings tax free ($7,400). Paying back the state tax deductions on the contributions will cost a bit more, but you will still have more money than you contributed to the plan in the end.

529 plans are a great way to save for college. If you have doubts, make sure you get the facts before you give up on this tax advantaged savings option. For more information regarding 529 plans, check out the SavingforCollege.com web site, or visit the site for your own state’s plan. 529 college savings plans can help you make more out of your college savings dollars, and they are more flexible than you may think.

Image courtesy of ddpavumba at FreeDigitalPhotos.net

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