What Is the State of Your College Savings Plan?
December 27, 2017
In this episode of The Bottom Line, Tim Schuster, a manager in EisnerAmper’s Private Business Services Group, discusses how starting a college savings account —sooner rather than later—can help alleviate “sticker shock” for your child’s college education. Tim talks about the different state-sponsored 529 plans, what you can use the money for, the tax benefits involved and more.
DP:So I’m going to throw a couple of numbers at you.
TS: Please do.
DP:According to The Financial Times, there’s currently $1.4 trillion of U.S. student loan debt, so it’s one of the biggest bubbles out there, by the way. And the average amount of student debt per person is a staggering $34,000. And these numbers are only increasing. However, there are some effective college saving vehicles out there that can help. Tell us about these.
TS: Of course. I also want to start this by discussing a number as well and the number that comes to mind is 1 million. $1 million is the actual average amount that people with a college degree can earn over their lifetime verses those with just a high school diploma. So investing in yourself almost always is a good idea. As for those savings accounts, the most common one is the 529 plan. It is a state-sponsored investment vehicle. It can be used for tuition, room and board, and books and supplies. Also, anyone can contribute to a person’s plan, whether it’s a family or a friend.
DP:What’s the difference between the different state plans that are out there?
TS: The 529 plan is the most common state savings plan. Before investing in a state-driven 529 plan, it’s always best to consult with your advisor. You know, each state’s rule will vary on investment vehicles and also the limitations to the plans.
DP:Tell us about some of the tax benefits for both recipients and contributors.
TS: Contributions are not deductible, but the earnings are tax free so long as the funds are used for college. Some states will offer a deduction for contributions to the plan and I believe around 30 different states currently offer a favorable tax treatment, and also you don’t have to have the actual funds put into the plan which is in the state you reside. They can be put into any state that you want – whatever state you think has the best investment vehicles. Many of these plans are extraordinarily low maintenance compared to other investment vehicles.
DP:I’m assuming that you’d want to look closely at each state plan’s maintenance fees.
TS: Of course.
DP:Because that would be a big impact on what they cost.
TS: Absolutely. That’s why it’s always important to just consult with your advisor on this before you jump into something, because some states do charge a bigger fee than other states and, of course, you’re always going to want to go with whatever state has the highest percentage of return with the lowest fees. So your advisor would be best to talk to about this before you jump into a 529 vehicle.
DP:Can you use part of your retirement savings accounts for education?
TS: Absolutely, but remember: You can always borrow for college, but you can’t borrow for your retirement.
TS: Having said that, if you want to dip into your retirement account, the IRS does allow you to do this. Roth IRAs are the most favorable for using funds for higher education. You can pull money out to help pay the cost of college education, tax free. It’s important to note, too, for Roth IRAs – and really Roth IRAs are probably the best vehicle in order to do this – that they will be coming out tax free for this. You just don’t see that anywhere else, and a lot of people do not know that actually, that they could use a Roth IRA in order to pay for college education. But, as I said before, the takeaway from any sort of college savings advice is just to talk to your advisor about this first because you don’t want to hinder your retirement plan – and that could potentially happen.
DP:What if you child winds up not going to college?
TS: You can use that for a trade school or you can transfer to a relative to use. You do run the risk of a penalty for withdrawal for non-educational use. That’s the key – non-educational use. There is a penalty for that.
DP:That’s good to know. How can you help closely held business owners balance the costs of running their businesses and pay for a college education?
TS: Most family businesses use their business to help the family. So a lot of aging owners are trying to find ways to help either their children or grandchildren. With relatively low funds and maintenance, 529 plans are extraordinarily favorable for these business owners because they don’t have to spend a lot of time thinking about how to invest,which vehicle is best. It’s hard to concentrate on that and concentrate on making their business successful. The key though is to start the fund at a young age.
DP:Well, you know what time it is, Tim. Our listeners can’t get enough of them. Let’s hear your New Jersey Historical Society fun fact for today.
TS: So I think all New Jersey residents are aware that Rutgers is the birthplace of college football. I mean it’s actually on their stadium, so if you ever drive past it you’ll see it there. But I don’t know if you guys are aware of this: The first organized baseball game was actually played in Hoboken in 1846, which is pre-Civil War; and the first professional basketball game was played in Trenton, New Jersey,in 1896.
DP:Cool. I knew the one about baseball. I didn’t know the one about basketball.
TS: Our state is the best.
DP:Well, Tim, thanks for this valuable information.
TS: My pleasure.
DP:And thank you for listening to “The Bottom Line” as part of the EisnerAmper podcast series. If you have any questions or there’s a topic you’d like us to cover, email us at contact@EisnerAmper.com and visit EisnerAmper.com for more information on this and a host of other topics. Join us for our next EisnerAmper podcast when we get down to business.