Rick Welch: Dollars and $ense
Saving for College
According to a recent survey of the College Board, the average academic year cost (tuition, room and board, books and supplies, personal expenses and transportation) for an in-state public college is $24,061. For a private institution, the average annual cost jumps to $47,831 or about $200,000 for a four-year degree. If you are the parent of school age children, you should also know that those costs are rising, on average, about 3.5% per year. With college costs growing each year, saving early for college education (after the purchase of a home) may be one of the most important decisions that parents can make.
There are a number of ways to pay for college – savings, grants, scholarships, student loans or a combination thereof. One good savings option is to open a 529 college savings account. Named for Section 529 of the federal tax code, these tax-advantaged savings plans are now one of the most popular options for making sure school expenses will be covered when your child goes off to college. With a 529 plan account, investments grow tax-free and can be withdrawn tax-free for qualified education expenses. Unlike retirement and other investment accounts, 529 plans are operated by each state and, though they must follow the same basic guidelines, can vary widely. Thirty-four states (including Pennsylvania) offer tax deductible plans to their residents. Pennsylvania is also one of six states which offers their residents tax deductions for contributions to any 529 plan. Pennsylvania residents may deduct up to $14,000 (single filers) and $28,000 (joint) when computing state taxable income. Neighboring New Jersey is one of nine states which have state income taxes, but do not offer an income tax deduction or credit for 529 contributions.
529 plan accounts can be opened by individuals at least 18 years old, legal custodians and trusts. The designated beneficiary (defined as an eligible family member) can be a child, stepchild, grandchild, sibling, parent, niece or nephew, in-law, cousin or even yourself. The savings which accumulate in your 529 plan account can be used at any eligible institution, which typically includes most accredited colleges and graduate schools, as well as professional and trade schools. What happens if your child decides not to go to college or, even better, graduates in just three years leaving money in the account? No problem. You can change the beneficiary of your 529 plan account at any time so long as the new beneficiary is also an eligible family member.
Investment options for 529 plan accounts typically include an age-based track and static model portfolios. An age-based track is based on the current age of the beneficiary. For a young child, say 8 years old, the account assets would be more heavily weighted in stocks for capital appreciation and long term growth. As the beneficiary reaches each new age milestone, the assets are transferred into a more conservative portfolio. At the age of 18 (through the years of college) the portfolio assets are transferred to a short-term portfolio comprised of bonds and money market investments. The automatic adjustment feature of age-based tracks makes them popular for account holders who do not want the responsibility of personally managing their portfolio allocations. With the static model option, the account holder selects the asset allocation (for example – Moderately Conservative) that is best suited to their risk tolerance and specific objectives. The model selected remains the portfolio allocation until changed by the account holder. A common theme of the two options is that as your student approaches college age the account asset allocation should tilt away from risky assets, like stocks, to more conservative assets like bonds and money market instruments.