SAVING FOR COLLEGE

For school year 2019-2020, the average price PER YEAR for college was $21K for an in-state student at a state school. For private schools…$50,000!!! For the past ten years, these prices have been inflating an average of 5% EACH YEAR! If that trend continues, projected tuitions in the future will be:

FIVE YEARS: $28,000 (public, in-state); $63,600 (private)

TEN YEARS: $35,750 (public, in-state); $81,000 (private)

FIFTEEN YEARS: $45,600 (public, in-state); $103,700 (private)

No matter the years you have available to prepare, this is a daunting task. For some, college tuition may accumulate to be larger than their home purchase! Congress realizes this and has offered some “help” if you can call it that. Below are options for investing for college and common tax-specific pros and cons associated with each. (Stay tuned for more help with a new First Lady and HEW Secretary)

(NOTE: The information below is a detailed account of the tax benefits of each topic. If someone is interested in investing in any of the savings accounts, or need advice as to which one, Don is the only member of Lewis Financial Tax Service that is licensed to discuss these matters.)

Coverdell Education Savings Account (ESA’s)

Coverdell ESA’s are not only used for post-secondary education, but they can also be used for K-12 expenses as well. These expenses include tuition, books, supplies, equipment, tutoring and special needs services. Unfortunately, there is an income limit ($95,000 Single, $195 MFJ). Not only that, but the maximum contribution per child is also  $2,000/year. (This figure is reduced if you claim an education credit on your income tax return.) This is calculated per child NOT per contributor. If one goes over that $2,000 per year, per child threshold, penalties will be owed. Be aware, since the contribution limit is so small, any “maintenance” fees charged by your financial institution will have a large impact.

When using an ESA, the parent/guardian/family member is the custodian, the student is the account holder. Therefore, they can withdraw money at any time, but it will come with tax and penalties owed. If they decide not to go to college, the money belongs to the child, albeit the balance must be withdrawn before the child turns 30, otherwise tax and penalties will be due. 

529 Plans:

529 plans are tax deferred and distributions are not taxed if the distribution goes toward a qualified education expense. These education expenses include tuition, fees, books, supplies, equipment, computers and sometimes room and board. The IRS also allows tax-free withdrawals up to $10,000 per year for K-12 tuition; the plan does not cover any other K-12 expenses. You may also take tax-free distributions to repay student loans!

Similar to a Roth IRA, 529 plan contributions are post-tax and therefore not deductible from federal income taxes. Some states offer deductions or credits, but North Carolina and Kentucky, among others, do not. The SECURE Act of 2019 allows tax-free distributions up to $10,000 per borrower (This is the lifetime limit). If the child doesn’t use all the funds, you will once again pay income tax and a penalty on the earnings portion of a non-qualified withdrawal. The penalties will be waved if the beneficiary receives a tax-free scholarship or attends a U.S. Military Academy. The balance can be transferred to another family members, such as cousins, grandchildren or even spouses, as the beneficiary.

529 plans can also be used for room and board as long as the student is enrolled at least half-time (6 credit hours per term). If the student resides on campus, those expenses cannot exceed the amount charged by the school. If the student lives off campus, room and board expenses are limited to the “cost of attendance” figures provided by the college.