By Fernando Diaz, Chief Financial Product Officer, Illinois State Treasurer
April 5, 2022 Haz clic AQUÍ para ver el blog en español.
Starting college is an exciting experience, but for many it can be a bit stressful. Two years ago, my oldest was getting ready to start college. Thankfully, I had prepared for this moment for over 10 years while working in higher education administration, assisting students transition from high school to higher education. Drawing upon the lessons learned helping my own daughter, and hundreds of other students, transition to college, I would like to share a few common misperceptions, resources, and tips for parents preparing to send their student to college.
Common Misperceptions
The 529 industry celebrated their 25th anniversary last year. That means there’s only a couple of generations of parents that have gone through the 529 college savings and subsequent college-paying experience. As a result, it can be no surprise that there still many misperceptions about 529 college savings accounts.
First, we often hear concerns from parents related to “locking away” assets in a 529 and not having the ability to “take it out” for special emergencies. To clarify this concern, we remind parents that 529 contributions are made post-tax and it is only the earnings portion of non-qualified withdrawals that is penalized and taxed at the federal level. The principal contribution is not.
For example, let’s say I contribute $1000 to my 529 account and, after 5 years, the initial $1000 has grown to $1200. If, in an emergency, I need to withdraw all the funds, I do not owe any taxes on the first $1000 I withdraw. Instead, I only owe taxes (plus a 10% penalty) on the $200 of earnings.
Secondly, we often hear of concerns about how or where the funds can be used. In general, 529 college savings plans can be used for in-state and out-of-state schools. This includes community college, four-year universities, graduate and professional schools, and apprenticeship programs.
Lastly, and what I personally hear the most, are concerns about 529 college savings accounts hurting financial aid eligibility. In general, 529 assets have little to no impact on financial aid calculations. Only accounts with over $10,000 are counted in the US Department of Education and for accounts over that limit, up to 5.64% of the value of the account may be included in the expected family contribution calculation for federal financial aid purposes. To learn more about this topic, one of our colleagues provides a nice overview: CLICK HERE.
Leverage Educational Resources
One of the most exciting things happening in 529 is the variety of innovative enhancements with financial education tools.
I recommend that parents and grandparents alike spend time navigating their respective 529 websites and account portals. 529 providers have really picked up their game with cool new features, including college-cost calculators, mobile apps, and full-blown college planning suites.
All of us – especially us parents who are navigating college process – need additional resources. Last year, the College Savings Plan Network announced an exciting partnership with Invite Education which offers a new comparison tool so that parents can find the best 529 plan for them. You can find the tool at www.collegesavings.org.
Maximize Contribution Options
One of the best features a 529 plan offers is the flexibility on who can put money away. Unlike retirement plans, just about anyone can make contributions to 529 accounts. That means that birthdays, graduations, and quinceañeras are great opportunities for friends and families to help send our bright minds to college. Most 529 plans have gifting platforms that makes this extremely easy and help bring financial literacy to all our loved ones.
Moreover, most savers set up automatic contributions through their bank account or payroll deduction. I’ve learned that setting this automatic feature allows me to budget accordingly because I don’t even see the money in my account.
About the Author
Fernando Diaz serves as the Chief Financial Product Officer for Illinois State Treasurer Michael Frerichs. Under this role, he leads the teams overseeing the Secure Choice Retirement Savings Program, the ABLE Program (Achieving a Better Life Experience), the 529 College Savings Programs: Bright Start and Bright Directions, and Financial Education Programs.
Prior to joining the Office of the Illinois State Treasurer, Fernando spent over 10 years in higher education; specifically focusing on Enrollment Management and Student Affairs initiatives.
He completed his bachelor’s in Political Science and master’s in Educational Leadership and Administration with a concentration in Higher Education Administration from Chicago State University. He also earned an MBA from the Kellogg School of Management at Northwestern University.