Blink, and they’re grown. For most parents, it feels like the span between kids’ birth to 18 years amounts to just a split second. Not only that, but it sure doesn’t seem that 18 years is enough time to grow a college fund. After all, don’t you have to work for 30-plus years in order to create a nice-sized retirement nest egg?
Don’t be daunted, because if you choose the right 529 plan, you’ll be able to grow your child’s college fund nicely over the course of 18 years, just in time for your little peanut to (unbelievably!) graduate from high school.
See Benzinga’s 529 Plans for more information.
What is a 529 plan?
By definition, a 529 plan is a state-sponsored, tax-advantaged investment account specifically designed to save for future education costs. Eligible educational institutions include any college, university, vocational school or other postsecondary educational institution.
It’s not just tuition that you can use a 529 plan. You can also use it to pay for room and board, fees, books, and other expenses at a variety of eligible schools, including colleges, universities, and trade or technical schools.
The year 2018 spells out good news for parents of students in elementary, middle and high school, too. Through the recent tax Cuts and Jobs Act, you can now use a 529 plan for an elementary or secondary public, private or religious school. This means you can now take federal tax-free withdrawals (up to $10,000) to pay for K-12 tuition.
Why use a 529 plan for college savings?
There are definitely reasons to use a 529 plan as a college savings vehicle, and those include:
- Though contributions aren’t deductible, they grow tax-free and are not taxed when the money is taken out for college.
- States offer tax breaks for specific plans (some don’t even require that the plan is from their state).
- They’re not run like custodial accounts, where the child takes ownership of assets when he/she reaches legal age.
- You can be as hands-on or as hands-off as you’d like. Investment management can be completely left up to the investment company, or you can choose your own investments and manage them yourself.
- Anyone can take advantage of a 529 plan.
- You can open a plan for more than one beneficiary, as long as all beneficiaries are U.S. citizens or resident aliens with a valid Social Security number or other taxpayer ID number.
The New York 529 Direct Plan
The New York 529 Direct Plan offers college savers a comprehensive swath of portfolios that certainly cover a broad spectrum of performance, expense ratios and other advantages, all with the goal of arming you and your child(ren) with the best possible scenario when going off to college.
Ascensus and Vanguard
The program manager for the Direct Plan is Ascensus Broker Dealer Services, Inc. It’s a part of Ascensus College Savings, a provider of administrative services for these types of plans.
Vanguard happens to be the investment manager for the Direct Plan and is one of the leading investment management firms in the world.
Who can open a plan?
Anyone can open a plan, no matter how old you are or what your income is, or whether you’re a resident of New York or not. (However, those out-of-staters might want to check into their own home state’s 529 plans to make sure they’re not missing out on tax benefits solely available for investments in that state’s 529 plan.)
The other requirement is that you must be a U.S. citizen or resident alien with a verified permanent U.S. address and valid Social Security number or other taxpayer identification number.
How to open a plan
It doesn’t take long to get a plan rolling, and the New York 529 College Savings Direct Plan Account website recommends having the following at the ready when you’re ready to open an account:
- Information about yourself, such as address, Social Security number, etc.
- Information about your successor, in the event of your death.
- Details about your beneficiary or beneficiaries (birthdate, Social Security number, etc.)
- Investments in mind that you plan to tackle.
- Your bank account number.
- Payroll deduction information.
Vanguard has some of the lowest fees out there, and this plan is no exception. The plan charges a total annual asset-based management fee of 0.15% of account assets. That means for every $1,000 you invest, you'll pay $1.50 in fees per year.
There are no advisor fees, sales commissions or annual account fees, like those you may find in other plans.
The New York Direct Plan also doesn’t charge additional fees for individuals who reside outside of New York.
The Direct Plan tax benefits include the following, which are pretty common for 529 plans. The differences that may exist between this plan and others may be the amount of state tax deductions:
- You won’t pay income tax on earnings; the money grows deferred from federal and state income taxes.
- You can make tax-free withdrawals when you use the money to pay for qualified educational expenses.
- If you’re a New York taxpayer, you may be able to deduct up to $5,000 ($10,000 if you’re married filing jointly) of your contributions.
- You can contribute up to $15,000 per year without having to pay federal gift taxes.
Performance and fund selection options
Past performance is not a guarantee of future performance, just as it is with all investments.
The Direct Plan has a full list of portfolio names at its command, which covers an entire spectrum of aggressive to conservative investments. They include the following:
- Aggressive Growth Portfolio
- Developed Markets Index Portfolio
- Mid-Cap Stock Index Portfolio
- Growth Stock Index Portfolio
- Value Stock Index Portfolio
- Small-Cap Stock Index Portfolio
- Aggressive Portfolio
- Growth Portfolio
- Blended Growth Portfolio
- Moderate Growth Portfolio
- Disciplined Growth Portfolio
- Conservative Growth Portfolio
- Conservative Portfolio
- Bond Market Index Portfolio
- Inflation-Protected Securities Portfolio
- Income Portfolio
- Balanced Income Portfolio
- Conservative Income Portfolio
- Interest Accumulation Portfolio
For a glimpse of performance for each portfolio, check out the full snapshot.
We’ve mentioned a lot of positives thus far regarding the New York 529 Direct Plan, but there may be negatives, and most of them go along with potential drawbacks for any 529 plan. One major drawback includes youngsters’ financial aid eligibility, which is directly impacted when there is money in a 529 plan. It’s better to have the money in the parents’ name rather than the students’, as the student assessment rate on the FAFSA is high, at 20 percent. For parents, it’s assessed at 5.64 percent.
Another drawback is that while your money can be withdrawn for any reason if it’s not demonstrated as a qualified educational expense, withdrawals will be subject to income taxes and a 10 percent penalty.
Obviously, market performance will fluctuate over the course of 18 years, and returns are never guaranteed, so that’s why you’re well-advised to start funds aggressively and then morph into conservative funds by the time your child closer to college age.
Saving early matters (as in, once your child is born) because of compound interest. The more you let compound interest take hold of your finances, the better off you’ll be on returns. An example on Vanguard’s website gives an excellent overview of the miracle of compound interest:
Imagine you saved $25 a week for 18 years and kept it in a bank account earning 1% annual interest. When it's time for college, you'd have about $25,750—the $23,400 you put in and about $2,350 in interest.
Now, imagine you invested the money and earned 6% a year. After 18 years, you'd have about $42,600 instead.
That's almost $17,000 in additional money your child can use for college!
Related content: BEST WAY TO SAVE FOR COLLEGE
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