On February 2nd, Punxsutawney Phil saw his shadow, meaning we get to enjoy six more weeks of winter. So about the time you read this, winter will be coming to a merciful end, according to Phil. (We won’t bring up his somewhat spotty track record!) A less folkloric tradition takes place in Nebraska near the end of winter. Instead of listening to a meteorological marmot, we make a game out of dodging potholes. Is there anything more exciting than doing your best Mario Andretti imitation to spice up a trip to the store?
It turns out 529 plans have something in common with late winter driving conditions in Nebraska…potholes. Before we get into the do’s and don’ts of 529s, a few quick reminders of the benefits of a 529.
- Contributions grow tax-deferred & withdrawals are tax-free if used for qualified education expenses
- Donor maintains control over the funds past the age of majority, unlike a custodial account in a child’s name
- Flexibility to shift monies from one 529 beneficiary to another qualifying family member
- 30 states allow for partial or full state income tax deductibility of contributions. For Nebraska, the annual amount is $10,000.
- Thanks to the new tax bill, 529s can now be used to pay for elementary and secondary education expenses.*
Okay, now for the do’s and don’ts regarding 529s.
DON’T – Open a 529 account through a financial advisor or broker, even if they promise not to charge their usual management fee. That’s because financial advisors “selling” 529 plans often get to keep 3-4% of the money you put into the plan as a commission. So if you put $10,000 annually into 529 plans for your two kids, $600 to $800 per year will go to the advisor/broker. Over 10 years, a 4% commission acts as a drag on the growth of these accounts to the tune of nearly $30,000, assuming annual returns of 7% and annual compounding. Whose college education are you funding?
DO – Open a 529 account directly through the state, what’s known as the direct plan or the consumer plan. For Nebraska, this is the Nebraska Education Savings Trust (NEST) Direct College Savings Plan. To see your state’s 529 plan offerings, click here. This means you will self-direct the investments for your kiddos, which can be as simple as choosing the age-based option. Financial advisors may claim they have access to other/better funds than what the state plan offers. Translation: These funds pay them higher fees.
DON’T – Assume your state’s 529 plan is the best option for you. Many states have plans with high fees, poor investment choices, or other drawbacks. Lucky for you, you’re not limited to the plan of the state you live in; you can use any state’s 529 plan. Keep in mind, your state may offer an income tax deduction for contributions, so there are a variety of factors to consider. SavingForCollege.com is a great resource for comparing 529 plans.
DO – Consult P&A if you’re thinking about opening a 529 account or already have one that was opened through an advisor/broker. We will show you how to open or roll over a 529 account using the consumer or direct approach we mentioned above.
DON’T – Rush to withdraw money from a 529 to pay for college expenses without consulting your accountant or P&A. Distributions from a 529 can impact financial aid eligibility, so there’s a science involved when it comes to taking money out of these plans. Every situation is a bit different.
As with all we do, our goal is to help you save your hard-earned money, avoid the financial piranhas, and to stretch your college savings dollars.
*As this article points out, 20 states still need to make legislative changes to follow the federal law. Nebraska is one of these states and there is a bill under consideration (LB804) that would add public, private, and parochial elementary and secondary schools to the list of qualified expenses beginning in 2020.
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