By Linda Lambert, Financial Capability Director for the College Savings Program at the Wisconsin Department of Financial Institutions (DFI)
September 22, 2020
As we celebrate College Savings Month throughout September, we are sensitive to the fact that many families are facing unprecedented financial uncertainty and are being extra cautious about where and how they invest their hard-earned dollars.
Times like these present the opportunity to review your college savings strategy to ensure that your savings plan is a responsible part of your overall financial planning.
Weathering the storm
It’s important to remember that the earlier you begin saving for college, the better. I remember opening 529 college savings accounts for my two kids right after each was born. We started with small amounts in their accounts because it was all we could afford at the time. Even though the savings were initially quite modest, they made a big difference by the time both kids went to college. One of the advantages of saving so early is that the compound interest on even a small amount can make a substantial financial difference when it’s time for college. If these uncertain economic times force your family to save at a lower level than you would like, it’s OK. Believe me, the decision will pay off for you like it did for my family.
Even if you cannot cover the full cost of tuition, every dollar saved makes a difference. Not only does having some savings increase the likelihood that a child will attend some form of postsecondary schooling, it also helps lower the amount of student debt they may have to pay back in the future.
Safe, Flexible Savings Options
It’s a fair question to ask: “Are 529 plans still a good investment, even when the economy is struggling?” Short answer, yes.
Longer answer, 529 plans are incredibly flexible and smart savings options because 529 plans factor in a family’s financial standing, risk tolerance, and children’s ages when developing a customized investment plan. These professionally managed plans provide account owners with a variety of investment options designed to meet their needs at whatever stage they are at in their college savings timeline.
Take my family as an example. Our initial investments and regular contributions started small, but as our financial situation changed, so did our savings habits. The size and frequency of our contributions began to grow. We even used the accounts as a powerful educational tool for our kids, helping to teach them financial literacy and wellness as they grew up. In fact, both of my children played an active role in their college savings by investing money from their birthdays, graduations, jobs, etc. Because of this, they were able to graduate college with little to no student debt.
529 plans offer a variety of investment options to meet the needs of both aggressive investors and those who are less risk tolerant. Most 529 plans offer age-based or enrollment year investment portfolios, which are designed to adjust the asset allocation to be less risk tolerant as your child approaches their college enrollment date. You are essentially balancing risk and return without any extra work on your part.
Additionally, you do not have to be a seasoned investor to save. The age-based or enrollment year options take out some of the guesswork, making it a good all-in-one solution to manage savings over time.
Always know that as economic situations and financial realities change for the better or worse, 529 plans are flexible enough to provide safe and effective savings options for your family.
Save smarter, not harder
We work hard to earn our money, isn’t it nice when our money, in turn, works for us? Well, when you invest in 529 plans, that’s exactly what happens.
Many states offer a powerful in-state tax deduction, meaning the money you invest, up to a certain amount, may qualify for a state tax deduction. In my state of Wisconsin, savers may be eligible to deduct up to $3,340 per beneficiary from their 2020 Wisconsin taxable income. Wisconsin families with more than one child or grandchild may be eligible for a state tax deduction of up to $6,680 for two children, $10,020 for three children, and so on. Annual contributions of more than $3,340 may be carried forward to be applied in subsequent tax years. Additionally, all college savings grow 100 percent tax free from state and federal taxes when used to pay for qualified expenses such as college tuition, room and board, books, etc.
Essentially, you are making money now on the savings you or your child will use in the future.
Employers can help
Many employers now offer 529 plans as part of their benefits package. Similar to a 401(k), employees have the option to make monthly 529 plan contributions through automatic payroll deduction, making it even easier to be consistent with saving.
If you are unsure if your company participates in one of these programs, check with your HR representative and ask them to consider offering payroll deductions into a college savings program if they are not currently.
I know now might be a difficult economic time for many families and the thought of saving for college may seem like a daunting challenge, but we’re here to help you establish a sound savings strategy. For more information about 529 plans, visit www.collegesavings.org.
Linda Lambert is the Financial Capability Director for the College Savings Program at the Wisconsin Department of Financial Institutions (DFI). Contact Linda at Linda.email@example.com.