How to pay for college with a 529 plan

Mark Kantrowitz of discusses how to use a 529 plan to save for college.

Wishon plus room and board at four-year public colleges hit twenty one thousand three hundred seventy dollars for the school year that’s according to the college board at four-year private schools it’s more than double that more than forty eight thousand dollars and those numbers are only going up so how are you gonna pay for your kids schooling it’s time for yahoo

You let’s talk 529 plans with mark kantrowitz he’s publisher and vp of research at saving for college commies joining us now from chicago to break it down for us so let’s begin at the beginning mark what exactly is a 529 a 529 plan is a tax and financial aid advantage way of saving for college you invest after-tax dollars kind of like a roth ira and the earnings

Accumulate on a tax-deferred basis if you use them for qualified higher education expenses that are entirely tax-free is there a cap on how much a mom and dad could put into one of these accounts and is there an income limit on who can take advantage of it there are no income phase outs or other income limits the aggregate limits vary by state ranging from two

Hundred thirty five thousand to five hundred twenty-nine thousand annual contributions there’s no specific annual contribution limit but there’s the annual gift tax exclusion which is $15,000 per year so mom and dad or grandma and grandpa could contribute thirty thousand dollars per child in a single year but they wanted to do more than that there’s something

Called five-year gift tax averaging or super funding which says you give five times as much and mark we’re just showing some of the things you said it you can use this towards college and college related expenses we were just showing some of the things that applies to and doesn’t apply to so break that down for us how how are people able to utilize this money you

Can use the money to pay for tuition required fees board if you’re enrolled at least halftime textbook supplies and equipment it’s not available for transportation unfortunately but you can use it and for those expenses the this year as a result of the tax cuts and jobs act of 2017 you can also use it to pay for a private k12 tuition up to ten thousand dollars a

Year not every state has come on board with this answer it’s about a dozen states that have still to pass legislation to allow it so you need to check with your state to see if it’s going to be considered a qualified distribution at the college part of this it’s curious because we have enough data now do they really are they really a good deal are these the kinds of

Things that more people should actually be doing to help cover the expenses there are a very good deal in addition to the tax benefits i mentioned previously there are 34 states plus the district of columbia that have a state income tax deduction or tax credit on contributions to the state’s five to nine plan so that’s an additional tax benefit that you don’t get

With a roth ira and you know when we talk about things like 401ks and saving for retirement there’s usually sort of suggested guidelines for what percentage of your salary you should be giving given the cost of college right now which as we talked about in the introduction is only going up do you guys have any sort of guidelines as to how much people beach should

Be contributing on a regular basis well if you if you start saving from birth you should aim to save about a third of future college costs because like any major of i cycle expense you’re going to spread the expenses out over time pass income which is savings current income and future income which is loans and if you do the math it works out that you should aim to

Save about the cost of a college education the year you child was born now if you want to benchmark if you’re in the right place multiply your child’s age by $3,000 or an in-state public college $5,000 for an out-of-state public college and $7,000 for a private nonprofit college that’s how much money you should have saved so far and if you’re under that you need

To save more if you’re over that you’re in good shape you’re making julie sweat mark appreciate your being here mark i can’t relates publisher saving for college comm giving us the one-two-three on 529 plans thanks for having me

Transcribed from video
How to pay for college with a 529 plan By Yahoo Finance