Saving for College?

by Expert Contributor Ryan Gray, Financial Advisor with Oppenheimer & Co. Inc.

Many of Newtown Square’s recent high school graduates are preparing to enter college in the fall. They are about to experience four years that many of us look back on as some of the best years of our lives. Unfortunately, it is going to cost them a lot more for the privilege. According to the National Center of Education Statistics, between 2005–2006 and 2015–16, prices for undergraduate tuition, fees, room, and board at public institutions rose 34 percent, and prices at private nonprofit institutions rose 26 percent, after adjustment for inflation.

One of the ways to save for college is with a 529 plan, a tax-advantaged account designed specifically for education savings. Withdrawals can be made for qualified education expenses that include tuition at elementary or secondary schools. Qualified expenses for college or graduate school include fees, books and room and board. Earnings in a 529 grow federal income tax deferred, and withdrawals for qualified educational expenses are exempt from federal income taxes.

529 plans are particularly beneficial for Pennsylvania residents. The state allows you, as a resident filing married/joint, to deduct a maximum of $30,000 per beneficiary from your annual taxable income for state income tax purposes when you make a contribution to any 529 savings plan (including those offered by other states). Not all 529 plans offer the same investment choices and cost structure, but as a resident of Pennsylvania, you are free to enjoy the state tax benefit regardless of which plan you select.

Owners of the 529 plan, typically parents or grandparents, make the investment and spending decisions. Owners also have the ability to change the beneficiary of the account.

PROs of a 529 Plan:

• Pennsylvania residents receive a state income tax deduction.

• Pennsylvania residents have flexibility to choose any 529 program and still receive full state tax benefit.

• Earnings grow tax-free.

• Flexibility to change the beneficiary annually. This allows unused funds to be used by siblings or other loved ones. The account can end up being used for generations.

• Almost anyone can contribute to the plan.

• Assets in the plan get more favorable treatment by FAFSA than student owned assets such as a custodial account under UGMA/UTMA; Free Application for Federal Student Aid, used to determine financial aid benefits.

• Ability to withdraw money penalty free, to match scholarships or entrance into a service academy.

CONs of a 529 Plan:

• Penalties for withdrawing money for purposes other than education.

• Possibility of changing tax regulations.

• It may be difficult to find the right or similar 529 plan for you because of the diverse array of options.

• Investment choices vary among plans. The options are outlined by the plan. It’s important to find a plan with sufficient low-cost options.

• Not all states give the same tax benefits. Must take residency into account when evaluating your options.

Ryan Gray, Director - Investments at Oppenheimer & Co. Inc., Radnor

Oppenheimer & Co. Inc.

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This newsletter is written by Ryan Gray, a Financial Advisor with Oppenheimer & Co. Inc., whose opinions do not necessarily reflect those of the firm. This newsletter is not and is under no circumstances to be construed as an offer to sell or buy any securities. Oppenheimer & Co. Inc. and/or its officers, directors, or employees, and/or members of their families may, at times, have positions in any securities mentioned herein. The information set forth herein has been derived from sources believed to be reliable but is not guaranteed as to accuracy and does not purport to be a complete analysis of the security, company, or industry involved. Opinions expressed herein are subject to change without notice. Additional information on the securities mentioned is available upon request.