Kidlist welcomes Jason Dobrzynski, CFP®, RLP®, CMFC® and Maralynn Kearney, MBA of Corsalus Financial as guest contributors to give us a breakdown of 529 plans and tips for college saving.
Both Jason and Maralynn are local residents, financial advisors, and parents (Jason of a 2 year-old daughter and infant son, and Maralynn of three teenagers), and Corsalus Financial is a wonderful Kidlist sponsor – we are honored that they offered to share their wisdom. You can connect with Jason and Maralynn on LinkedIn and Corsalus Group on Facebook.
Corsalus Kids Guide to 529s: College Savings
Starting a college savings fund for your child doesn’t have to be complicated. We’ve complied all the information that you need to know so you can get started today!
At Corsalus Financial, we have found that 529 accounts are the most effective tool for the majority of college savings accounts in the state of Illinois. If you have questions about other types of savings accounts that can be used for your children’s needs, we would welcome a meeting with you to find the right fit for your specific situation.
Here are some frequently asked questions that we will answer below:
- What is a 529 and what are the benefits of establishing one for my child?
- Is there a limit to how much I can contribute per child per year?
- What if my parents want to open a 529 for my child? Is there a limit to how many accounts each child may have? Who controls the money that they contribute?
- How much should I save for my child?
- Is a 529 only for college? If my child decides not to go to college or has scholarships that cover their expenses, will I lose out on that money?
- Where do I start? Where can I open a 529 for my child?
What is a 529 plan?
Named after section 529 of the tax code, the 529 plan is a tax-advantaged plan operated by a state or an educational institution originally designed to encourage saving for college. Funds inside a 529 plan have the potential to grow tax deferred and withdrawals are free of federal income tax when used to pay qualified higher-education expenses, including tuition, fees, room and board, books, supplies, computer equipment, software, and Internet access.
Although contributions to 529 plans are not deductible from federal income taxes, many states, including Illinois, offer tax deductions or credits, typically to residents who contribute to a plan sponsored by their state. For Illinois, Bright Directions is the state-sponsored plan. If the Illinois tax credit is important to you, this is the only plan that offers that benefit. Luckily, it is a highly rated plan! www.brightdirections.com
Other state benefits may include financial aid, scholarship funds, and protection from creditors. You are not limited to investing only in your state’s plan.
Is there a limit to how much I can contribute per child per year?
On the minimum side, you can open an account with as little as $10 in the Bright Directions program. There is no initial investment requirement, which makes it easy to get started even with small amounts.
On the maximum side, the simple answer to this question is that each parent can give each child up to $15,000 per year into their 529 plan. It’s a bit more complicated, so the following paragraph explains it for those who crave the details!
One of the many benefits of saving for a child’s future college education with a 529 plan is that contributions are considered gifts for tax purposes. In 2020, gifts totaling up to $15,000 per individual will qualify for the annual gift tax exclusion. Assuming you are not giving your child other cash gifts or property during the year, this means that if you if you and your spouse have two children, you can jointly give $60,000 without gift-tax consequences, since each child can receive $15,000 in gifts from you and $15,000 in gifts from your spouse.
If you happen to have more money that you want to contribute, there is a way to make 5 years of gifts at one time, but that involves some special tax forms each year. Call us for details if you want to know more!
What if my parents want to open a 529 for my child? Is there a limit to how many accounts each child may have? Who controls the money that they contribute?
How wonderful that loved ones want to contribute to this life-changing gift! Many grandparents and extended family members contribute regularly to 529s for their loved ones. We have seen the joy and rewarding feelings it brings to the gift-giver who is fortunate to be able to offer such a gift.
The good news is that children can have multiple accounts opened by family members or friends. Or, others can contribute directly to an account already opened by somebody else for the child. Keep in mind that the person who opens the account is the “owner” of the account, and retains control of the investment and distribution decisions. Some families like to simplify the process by having various family members fund one account, and other families find that each person wants to ultimately control their own gift.
If there are multiple accounts opened for your child, and if the total 529 balance reaches $450,000, no further contributions are allowed. This is a problem we have yet to see!
How much should I save for my child?
The answer to this is very personal, and every family will have a different answer. Working with a Financial Advisor can help you set your personal goal. Questions to consider when planning your targeted amount should include:
- What are you goals for your child?
- What type of college do you see in the future? Is it a public or private institution?
- Do you see them attending two years at a community college before going to a 4-year institution?
- Do you want to save for graduate school too?
- How many children do you need or want to help?
- Will your family be able to pay some costs through normal cash flow during the college years?
- How to you feel about student and/or parent loans?
- Will your student work a job when in school?
Working with an Advisor can help you target your own ideal saving’s goal. But as a very general rule, many families opt to try to save about half to three-quarters of the expected expenses in advance.
Is a 529 only for college? If my child decides not to go to college or has scholarships that cover their expenses, will I lose out on that money?
529 accounts are meant to be used to save for secondary education, which includes college and trade schools. Recent legislation has opened the door to using a portion of them for private elementary or high school education, as well as to pay back student loans. The details of those two options are outside of the scope of this article, but feel free to call us for details.
If your child receives a scholarship, you can take the money out of your 529 account up the amount of their scholarship, without penalty.
If your child decided against going to college or trade school, you have several options including:
- Changing the beneficiary on their account to another family member. This is typically used for a sibling, but can also be used for a parent, if desired.
- Closing their account. In this scenario, you would have to pay a 10% penalty on the growth portion of their 529 account, as well as income taxes on the growth. For example, if you put $10,000 into an account, and it is now worth $18,000 when the child decides that additional education is not for him/her, you would pay a 10% penalty on the growth, which would equal 10% of $8,000 or $800, plus the growth would be considered income that year and would be subjected to your marginal income tax rate that year.
- Leaving the account intact for a potential future use, such as maybe your child’s child, or a change of heart about college later in life!
How could this work for me?
Let’s assume you decide to open a 529 for future tuition when a child you love is two years old. As the owner of this account, you would control all decisions such as the timing and amounts of your contributions, how it is invested, and when and how the withdrawals will be used for the student’s benefit.
If you are an Illinois State taxpayer and make yearly contributions to a state-approved plan, you would be eligible to deduct those contributions from Illinois State income up to $10,000 per Illinois taxpayer or $20,000 for married Illinois taxpayers filing a joint return.
For more specific information regarding Illinois sponsored plans, please visit www.illinoistreasurer.gov/Individuals/College_Savings. For other state plans, please visit your state’s website for details or visit www.savingforcollege.com as one of many resources.
Where do I start? Where can I open a 529 for my child?
If you would like to discuss opening a College Savings Plan for a child you love, please feel free to contact us via www.corsalus.com. You have options as to what plan you choose, and also whether you want to manage it independently, or with the help of an Advisor. We can explain it to you either way!
Corsalus Financial
1220 Kensington Rd Suite 200
Oak Brook, IL 60523
(630) 954-4611
More articles and tips from Corsalus Financial:
This article is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. Please consult your financial advisors prior to making financial decisions. If you have questions for Corsalus Financial, please call or email at 630-954-4611 or corsalus@wradvisors.com.
Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
When 529 plan withdrawals are not used for qualified education expenses, earnings may be subject to ordinary federal and state income taxes and a 10% federal income tax penalty. As with other investments, there are fees and expenses associated with 529 plans. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated.
Rules for 529 plans can vary by state, and some states may not adopt the federal provision for K-12 tuition. Be sure to consult a tax professional familiar with the laws of your state.
Please note that Waddell & Reed, Inc. is not affiliated with the sites listed and makes no representation as to the completeness or accuracy of information provided at these sites.
Securities and Investment Advisory Services offered through Waddell & Reed, Inc., a Broker/Dealer, Member FINRA/SIPC and Federally Registered Investment Advisor. Corsalus Financial is a team name used by Advisors affiliated with Waddell & Reed for marketing purposes only.
Waddell & Reed is not affiliated with Kidlist (2/20).
