Though education costs continue to climb, starting to save early can make a difference.
Of all the things that keep parents awake at night, their children's looming college costs are among the most daunting. For the 2019-2020 school year, the costs for a four-year private college averaged $53,980 per year for tuition, fees, room and board, books and supplies, transportation and other expenses.1 Assuming a college-cost inflation rate of 6%, a parent may need $399,000 in 2029 to pay college expenses for today’s 9-year-old.2 And that’s for just one child.
With costs so high, many students and parents are taking on significant student loan debt to pay for college. Roughly two-thirds of college seniors who graduated in 2018 did so with loans, with an average debt burden of $29,200.3
Starting the process early to save toward the college costs of a child or grandchild can help limit how much your future student will have to borrow. Consider putting those funds into a 529 education plan, a tax-advantaged way to invest toward education expenses.
Named after Section 529 of the Internal Revenue Code, a 529 plan is a tax-advantaged vehicle, which allows you to invest for future education expenses. A 529 plan creates an incentive for families to invest toward education costs because earnings in the plan can be tax-deferred, with withdrawals being exempt from federal and, in most cases, state income taxes if you use the funds for qualified expenses, such as tuition, fees, room and board, and supplies. Many states provide additional state tax deductions or tax credits. Additionally, assets in a 529 plan are outside of the account owner’s estate for estate-tax purposes.
A 529 plan can also offer flexibility. Some investments that are used for education funding require that the assets be given to the beneficiary when they reach a certain age. If you open a 529 plan, as the owner of the account, you continue to make all of the decisions. For example, if your daughter earns a scholarship and won’t fully drawdown the money in the account, you can choose a different beneficiary within the same family, or even use the funds for your own education needs.
The definition of qualified education expenses now includes tuition for K-12 schools because of the Tax Cuts and Jobs Act of 2017. Note that qualified withdrawals for eligible K-12 tuition are limited to $10,000 per beneficiary per year. Tax treatment will vary by state. 4
Still, many are unaware of 529 plans and their benefits. More than two-thirds of people surveyed nationally in 2019 said they haven’t heard of 529 plans.5 “Many people want to save for college, but don’t know where to start,” says Jennifer Tierney, Executive Director, Morgan Stanley Wealth Management Investment Solutions and 529 Plans Product Manager.
Though states began creating college savings plans in the 1980s, they didn’t gain federal tax relief under Section 529 of the Internal Revenue Code until 1996. As a result, those looking to help extended family members may be unaware of 529 plans.
“Many of our clients are grandparents looking to help their children handle future education expenses,” Tierney says. “We encourage them to take a look at 529 plans, which may not have been on their radar the last time they were saving for college.”
Anyone can create a 529 plan for a designated beneficiary, and those who wish to contribute to the account may do so. These plans typically have high lifetime contribution limits, beginning at $200,000-$300,000 and sometimes going as high as $500,000. Annual contributions of up to $15,000, or $30,000 for couples filing jointly, are treated as gifts and qualify for the annual per-beneficiary gift tax exclusion. Additionally, 529 plans employ a special rule: An upfront contribution in one year of up to $75,000, or $150,000 for married couples—the equivalent of five years' contributions—may be made without any gift tax consequences. This five-year gifting election can give your assets more time to grow if you're able to make such a contribution, and the “accelerated gift” is excluded from the donor’s estate.6
When it comes to investing in a 529 plan, typically the earlier you can start putting money away, the better.
Still, it’s never too late to start saving for college. Money set aside when a child is 16 will still have several years to grow, assuming you use those funds to pay for the later years of undergraduate expenses, or even graduate school.
Your Financial Advisor can help you choose a 529 plan as part of your wealth strategy. He or she can also offer valuable guidance as it relates to regulatory changes and during times of market volatility.
“A Financial Advisor can help you project what your costs could be, provide guidance on selecting a 529 plan, recommend an asset allocation and tailor your contribution schedule based on your needs,” says Marc Dextraze, Managing Director, Morgan Stanley Wealth Management Investment Solutions, and Co-Head of Product Development for Traditional Investment Products.
A 529 plan is a convenient, flexible and tax-advantaged way to invest for a child's education expenses. Morgan Stanley offers a robust platform of investment options, including the Morgan Stanley National Advisory 529 Plan a first-of-its-kind advisory 529 plan that enables you to benefit from fiduciary oversight of your education funding strategy within the context of your broader portfolio and life goals. If you have questions or need more information about 529 plans available through Morgan Stanley, contact your Financial Advisor or Private Wealth Advisor today.