Trajan Wells, Intern, University of Iowa, Finance BBA 2021
Nearing the end of the craziest summer one could imagine, September comes to us as College Savings Month. Along with thoughts of even more adjustments to normalcy, the new worlds that college students and parents are headed toward remain top of mind. These new opportunities and life changes require a lot of consideration.
At MFG, we are putting our spotlight onto 529 college savings plans, advocating for readjustments provided market conditions and evolving changes to college expenses. Establishing and maintaining an actively looked-after 529 is often one of the most beneficial mechanisms used to plan for and cover higher education expenses. Now is a great time to re-evaluate contributions to these 529 plans, specific to your changing needs and goals. And if you don’t currently have one, set up a 529 with the help of MFG and College Savings Iowa.
Creating a 529
Almost any family member can open a 529, including parents, grandparents, relatives, friends. The account owner is responsible for choosing investments, a beneficiary, and how the money is used. This is where MFG can provide our expert level of guidance.
The future student (the beneficiary) the account is opened for, with the funds eventually funding their education, this person must be US Citizen or have social security number.
If in some case the beneficiary doesn’t continue education or plan to use the funds, the account can be changed to an eligible family member of the same purpose of funding their education.
Withdrawing the funds altogether without the purpose of paying for education comes with 10% penalty in addition to income taxation on earnings for these non-qualified expenses.
Starting the account needs only an initial investment of $25 and usually only takes about 10 minutes to complete online.
Advantages to 529s
529s can be used for the following:
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Postsecondary trade and vocational schools.
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2 and 4-year colleges.
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Postgraduate programs.
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K-12 public, private or religious institutions (tuition only); subject to $10,000 annual tuition limitations
Tax benefits
Tax-deferred earnings: 529 account assets grow deferred from federal and state income taxes.
Tax-free withdrawals: You will not pay taxes on money withdrawn from your 529 account to pay for qualified education expenses.
Tax deductions for Iowa taxpayers: Iowa taxpayers who are participants may deduct up to $3,439 for 2020 (adjusted annually with inflation) of their contributions per Beneficiary, including rollovers, in figuring their adjusted gross income for Iowa income tax purposes. This deduction applies to each Beneficiary account owned and contribute to. For example, married Participants who contribute to separate accounts on behalf of their two children can deduct up to $13,756 (4 x $3,439) in 2020.
Federal gift tax incentive: Individuals are able to contribute up to $75,000 in a single year for each beneficiary ($150,000 for a married couple filing jointly) without incurring federal gift tax, given you do not make any other gifts to that beneficiary for 5 years. The benefit of such a gift, provides the account owner the benefit of control, but also recognizing the assets are now outside of their estate should there be an estate tax concern.
For further specifics on this information, and more answers to questions see: https://www.collegesavingsiowa.com/home/basics-of-529s/529-basics.html
Avoiding Financial Stress and Its Harmful Effects
We also know in many cases, financial stress brings a stinging impact for those involved. More specifically, in college students themselves, academic performance almost always suffers greatly when these learners are left hanging with financial problems to solve on top of homework and studying.
Findings in The Academic Impact of Financial Stress on College Students, a study published in 2009 by So-Hyun Joo, PhD, Dorothy Bagwell Durband, PhD, and John Grable, PhD found the following:
“When it relates to time, energy, and stress; all components of a healthy college student’s livelihood that are in constant use and often in short supply, 38% percent of students worried constantly about their student debt load, not even including their daily expenses in this notion.”
Researchers found smaller groups that existed within the affected students; those who often had to reduce course loads or take a semester off due to unforeseen financial predicaments. Many students come into the college world prepared for the challenges of rigorous learning, but unprepared for the distraction financial worries may bring.
Setbacks, worries, and the use of energy students don’t have often leads to the multiplication of more stressful decisions; at a time when learning and understanding course material as they prepare for careers becomes harder and harder. Even if solutions and finances are sorted out, payment usually comes first.
You can read this study here https://journals.sagepub.com/doi/pdf/10.2190/CS.10.3.c
As college tuition and fees have escalated at a rate faster than inflation and median family income over the past 11 years (College Board, 2006), the world around has had to adapt. We can’t singlehandedly stop the expenses from rising rapidly, but we can plan for it.
The keys to college planning show themselves very close to us, as the constantly changing goals and ideas that come directly from those we love and plan for. Combining all forces, we actively include college savings vehicles into planning strategies and recognizing these long-term goals as they evolve and reshape every year.
Kids change, both in ideas and future goals as often as their taste in lunch does– so should the planning that comes with their goals. Keeping constant adaptation and reflection in mind, as advisors, we are able to manage 529s, built to flow through a client’s overall retirement and savings plan. We can watch the obstacles and unplanned choices as they arise and subsequently fall, in and out of our lives, planning for each of these hidden paths as they become part of our futures.
