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Education is the Greatest Gift

| May 26, 2020
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It is never too early to start planning for your child or grandchild’s future education. With so much uncertainty in the world, this would help ensure your child or grandchild has their future education expenses covered. It is always the ideal time to think about preparing for your child or grandchild's higher education expenses.  The costs of pursuing a higher education are increasing annually and proper financial planning is key.  I truly believe that one of the best gifts you your children is a solid education.  

I’m sure you have heard of 529 plans.  But, perhaps you are unsure of exactly how it works and any restrictions associated with spending those saved dollars. A 529 Plan is a college savings plan with great tax benefits. Contributions into the plan are considered gifts for tax purposes. An individual can gift up to $15,000 per year, and a couple can gift up to $30,000 per year. Gifts over this amount are subject to a gift tax.  There is a 5-year gift option where a lump-sum gift can be spread over 5 years tax-free. There is a $75,000 max for individuals and a $150,000 max for couples with this option. No other gifts of additional money can be given in those five years without tax consequences.  The earnings on contributions made to a 529 plan accumulate on a tax-deferred basis. If disbursements from the account are used for qualified education expenses they are not taxed federally.  There are two types of 529 plans: a prepaid tuition plan, and a college savings plan. 

A prepaid tuition donation plan allows the saver to purchase units/credits for future tuition expenses and qualified fees at participating universities and colleges. These purchased credits cannot be used for room and boarding, nor can they be used for K-12 tuition.

State-sponsored plans often have residency requirements, and are generally intended for use at a public university. If the beneficiary attends a private institution, the savings will likely not cover as much of the cost. 

A college savings plan is an account to which contributions are invested in a portfolio meeting the needs and risk tolerance of the saver. A college savings plan covers qualified higher education expenses including tuition, and room and board. In many states, this type of account plan can be used to pay for K-12 tuition and expenses up to 10k per year. As with many investments, it is possible to lose money instead of earning it.

It’s important to work with a financial advisor to determine how much risk is appropriate for your investments in order to reach your goals. Usually, as the beneficiary reaches college age, the portfolio will shift toward more conservative investments. 

It’s important to carefully review each plan and to understand the associated fees. Each plan has an offering circular which details the costs and fees involved. The prepaid tuition plans generally charge an enrollment fee and ongoing administrative fees. Some plans will waive or reduce some fees if a large account balance is maintained. 

If money is left over after the student has completed their degree, there are many options. If the student plans to attend graduate school, it can be used at a later date. The plan can also be signed over to another child in the family who is planning to attend higher education.  If instead the student wishes to withdraw the remaining funds, there are typically fees associated with a withdrawal.  

Although this savings plan can be complex and overwhelming, together we can create a solid plan for your child or grandchild’s future education.


Rick Farrar is a Registered Representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker-dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Lincoln Financial Advisors Corp. and its representatives do not provide legal or tax advice.



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