A report released by Sallie Mae last week shows that 52% of parents are “saving the same amount or more” for college despite the down economy. The report continues:
In fact, 62 percent of parents of college-bound children are saving for education, trailing only retirement as a savings priority. Fourteen percent of parents reported saving the most for their children’s college, second to 27 percent who save the most for retirement. For nearly half (46 percent) of parents, saving for college ranks in their top three savings priorities.
It amazes me how many people are able to set aside savings for college but don’t want to invest in a 529 plan right now because of “market conditions”. Those market conditions have pushed the market higher three months in a row, and people have missed out ona 25% gain.
In light of the recession, we’ve already seen the federal government give more tax breaks for 529 plans. So far it has been in the form of helping parents with kids already in college through expanding eligible 529 plan expenses.
But a new proposal could also provide upfront tax benefits when you contribute to your 529 plan. The proposal would give you up to a $2,000 immediate tax credit when contributing to a 529 plan. Although this sounds nice, keep in mind there’s a lot of work to before this becomes law (if it even does).
Currently your federal tax benefits for 529 plan are limited to not paying taxes on your earnings in 529 plans. An upfront tax credit would fundamentally alter the value of 529 plans…making them much more attractive. (Some states already offer upfront credits).
Stuck with big losses in your 529 account this year?
The Wall Street Journal reports on a way you may be able to deduct these losses. But be forwarned: there are many caveats, especially if your state offered up front tax benefits for your contributions. And if you child isn’t going to school in the next year or two, do you really want to withdraw funds from your 529 account with stock prices are this low?
Here’s the explanation, in part:
Imagine a couple that put $120,000 into a 529 tax shelter for a grandchild a year ago. If the market had continued to boom, that money would have grown tax-free. As long as it was eventually spent on qualified tuition expenses, no tax would have been paid on withdrawals. These 529 plans are terrific tax shelters for middle-class couples with children or grandchildren.
Obviously, though, investing has been a hazardous occupation of late. Imagine that same couple now looks at the 529 and realizes those investments have plunged to just $70,000 in value.
Yikes. That’s a $50,000 loss.
The couple can close the account and withdraw the money. At that point, they may be able to deduct nearly all of that loss from their taxable income. That wouldn’t restore all the money lost, but could at least soften the blow.
Many Americans may be missing out on this deduction. Most 529 plans are sold through financial advisors, but comparatively few know about this rule. (For those seeking more details, they can be found in IRS Publication 970, Tax Benefits for Education, page 51, and in the Federal Register, Vol. 73, No. 13, page 3445.)
My daughter just turned 2, and I started investing in her 529 plan when she was about 3 months old. Needless to say, the account isn’t worth as much as I’ve put into it.
No one is happy about the global stock market crash. But that doesn’t mean you should stop contributing to 529 plans. Think about it this way. You may have “bought” the stock market at 14,000, and 13,000 and 12,000 and 11,000. Now that it’s cheaper, should you stop buying it? One of the nice things about 529 plans is they let you set up a regularly monthly contribution. If you stick to your plan, that means you buy into the market every month. This allows you to dollar cost average your investments.
Although my time horizon is long, you need to evaluate your strategy if your kid is going to college soon. Many 529 plans offer time horizon funds which automatically switch some of your money into bonds and less risky investments when your kid gets closer to college. That way a sudden crash in the market, like what we’ve seen lately, won’t keep you from being able to pay for college.
Unless you think the market will continue on a downward trajectory from now until when your kid goes to college, it probably makes sense to stick to your plan and keep investing on a regular basis.
What better time than back-to-school time to think about saving for college. Congress passed a resolution back in 2003 to make September College Savings Month. It’s a time to reflect on your goals of saving for college. Have you set up a 529 plan? Are you contributing enough to the plan to meet your goals?
For more assistance setting up a 529 plan, be sure to visit the 529 plan guide.