Please note: This is not intended to substitute for advice from your tax adviser. Please consult with a qualified adviser prior to making investment decisions.
Esteemed Colleagues:
A fellow asked me a great question this morning about the tax-deductible educational savings accounts about which I wrote to Parents last week. The question was: “How truly useful can this new tax break be to younger families just starting out life financially?”
The answer to the question remains: Open your state 529 account ASAP and start socking away money for your children now. Here’s why.
The 2018 Tax Law allows us to put earned income into the 529 educational savings plan, subtract the amount from our tax bill, then withdraw the funds later to pay for school tuition. We don’t have to wait for our kids to be in college to withdraw the funds. Since we plan to have that big college tuition bill to deal with anyway, we should put as much of this tax-free income away into the 529 anyway (good financial planning).
Hence we can do some very basic planning: Because of the new law, we ought to open a 529 account because, even with lower incomes now than we are likely to have later in our lives, we can use the 529 as our way to (1) save money without it first being taxed, and (2) grow the “college fund” for our children with the great added advantage that we can use the funds before our children get to college to help pay for their independent/private school tuition. True, the advantage of the new Tax Law will not be immediately useful for our private school tuition costs; but the more we can put into it, the sooner will be available some relief for us who favor good independent schools.
Hence, some serious planning can take place. Families keen on the great benefits of an independent school education for their children can more and more afford it. It will take a few years to accrue enough funds (because we’ll be saving for college too), but the advantage is clear.
Celia and I have three children. Each is about three years apart. We began socking away money annually for the two boys. Any cash gift from a grandparent (e.g.) went into this fund and we put any windfall into the fund. But these were not 529 funds; so we were taxed on the funds from our income which we put into the college funds. But for our youngest—the daughter in her third year at Sewanee—we opened pretty much “at birth” a Utah 529 college savings account. That account grew for 18 years and we were quite gratified by the way it did grow! (Our investment advisor recommended the Utah program because of the investment performance of the Utah fund-managers.)
Had the new 2018 private-school provision been in place, we would’ve been able to use some of the Utah funds to pay for our daughter’s tuition at the independent school she attended in high school.
Let me be bold: I believe with all my heart that preparation in the independent schools we chose for our three children gave each one of them, not only a great, comprehensive school experience, but advantages over many of their peers at the college level. (I personally favor high-quality faith-basedschools but I know that there are some excellent “secular” prep schools too, which seek to educate the whole person best they can.)
This is why I see the 529 education savings plan as a tremendous new benefit to parents of all ages.
Thanks for your time! Blessings.
Chip