The Ultimate Guide to College Savings Plans

Given the increasingly high cost of obtaining a college education, planning for your child or children’s education should be a high priority, even if your child just started elementary school. The 2023-2024 average cost of sending a child (or grandchild) to a four-year college looks like this:

• If your child or grandchild attends a school within their state, the average annual tuition and related fees cost approximately $11,260. You can add roughly $17,580 for room and board, bringing the annual cost to $28,840. Over four years, that could amount to $115,360, plus tuition increases due to inflation and other considerations.

• When you look at tuition for your child attending a school as an out-of-state student, the tuition costs average $29,150. Adding room and board into the equation ($17,580), the annual cost can be $46,730 per year, totaling about $186,920 over four years.

• These numbers are just averages for standard universities, not Harvard or Stanford. The costs can be significantly higher if you send your child/grandchild to a private Ivy League school. 

That’s why it’s important to begin funding your education savings accounts as soon as possible to leverage the power of compounding rates of return over longer periods of time. Starting your savings account early may also help reduce any stress this may cause you in the future. 

As financial planning professionals in Buffalo Grove, the SGL Financial team assists families in creating sophisticated college education plans, which we’ll explore in this blog. Whether you need a basic 529 college savings plan, a Dynasty 529 plan, or other education plans, our guide will help you better understand these educational savings choices. 

Family Financial Planning: Advice from a Buffalo Grove, IL CFP® Professional

What are 529 College Savings Plans?

Designed to pay for college education expenses, 529 plans offer tax advantages and flexibility, making them attractive for parents, grandparents, and students. Whether starting early for a child’s college fund or preparing for your continuing education, understanding 529 plans can help you make informed decisions that benefit you and your family.

529 plans were created as part of the Small Business Job Protection Act of 1996 and are named after Section 529 of the Internal Revenue Code. Initially, these plans focused on providing tax advantages for college savings:

• Tax-Free Earnings: Investments in a 529 plan grow tax-free. Any interest, dividends, or capital gains earned are not subject to federal (and typically state) income taxes if used for qualified education expenses.

• Tax-Free Withdrawals: Withdrawals are tax-free for qualified education expenses like tuition, fees, books, supplies, and equipment. Room and board are also included if the beneficiary is at least a half-time student.

• State Tax Benefits: Many states offer tax deductions or credits for contributions to your state’s 529 plan, providing significant tax savings.

• Gift Tax Benefits: Contributions to a 529 plan qualify for the annual gift tax exclusion of $17,000 per beneficiary per year (as of 2024). A special provision allows for “super funding,” where you can make five years’ worth of contributions ($85,000 per beneficiary) in a year without incurring gift taxes.

• Estate Tax Benefits: Contributions to a 529 plan are removed from your estate, helping reduce potential estate taxes. This makes 529 plans effective for minimizing your taxable estate while saving for the education of children and grandchildren.

• Flexibility and Control: If necessary, you retain control over the account, including changing the beneficiary to another qualified family member.

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Comparing a 529 Plan to a Dynasty 529 Plan

The Dynasty 529 plan, or a Multigenerational 529, is designed to provide educational funding for multiple generations within a family. It leverages the tax advantages of 529 plans while incorporating estate planning strategies.

529 Plans: The primary purpose is to serve as a tax-advantaged savings account for future education expenses. Contributions grow tax-free, withdrawals for qualified expenses are tax-free, there are high contribution limits, flexibility in changing the beneficiaries, and state tax benefits.

Dynasty 529 Plans: They are designed to provide long-term, multi-generational educational funding. Key features include tax-free growth and withdrawals, structured for multiple generations, substantial contributions utilizing gift tax exemptions, estate planning integration, and flexible beneficiaries.

Looking for a wealth management firm to help you build a financial foundation? Learn more about SGL Financial. 

Coverdell Education Savings Accounts (ESAs)

Coverdell ESAs are tax-deferred trusts that enable you to contribute up to $2,000 per year for a child’s educational expenses from kindergarten through college. Funds from ESAs can be used for various educational costs, not limited to college.

Custodial Accounts (UGMA/UTMA)

These accounts are simpler yet less tax-efficient ways to save for college. They involve transferring assets to a minor, who will gain control of the account when they reach legal age.

How to Choose the Right College Savings Plan

Here are several factors you should consider:

1. Evaluate how much you need to save based on the projected costs of the colleges your child might attend. There is software that will project these costs for you.
2. Determine the tax implications each plan type may have on your financial situation. Each plan offers different tax benefits. For example, 529 plans offer tax-free withdrawals for qualified education expenses.
3. Investigate what investment choices are available in each type of plan. A diversified portfolio can help manage risk and improve potential returns.
4. Research if your state offers additional tax incentives for contributing to a 529 plan, which may influence your decision.

Integrating College Savings into Your Financial Plan

At SGL Financial, we understand that saving for college should be a part of a comprehensive financial plan that includes retirement planning, estate planning, and more. Integrating your college savings plan with other financial strategies can help you manage your resources more effectively and pursue your financial goals.

Our advisors can help you understand how a college savings plan fits into your financial picture, considering factors like your investment horizon, risk tolerance, and financial needs. We can also assist in regularly reviewing your plan to adjust for changes in income, tuition costs, and tax laws, ensuring that your savings strategy remains aligned with your educational and financial objectives.

To learn more about our educational planning services, connect with us.