How to make paying for Catholic education easier

529 College Savings Plan

By Eric Higdon, Class of ’02 and Financial Advisor with Retirement and Financial Strategies in Owensboro, KY

Seeing such large swings in the stock market because of the coronavirus has been frustrating and confusing for the indi vidual investor as well as financial professionals. This has also served as a reminder that our investment portfolio needs to be regularly maintained and monitored. Regularly reviewing your investment portfolio helps to ensure that your investment mix lines up with your goals and time horizon. A person that does not intend to access their investment dollars for more than 10 years traditionally should invest differently than someone who needs access to their money in less than 2 years. Additionally, a person intending to grow their dollars should invest differently than a person looking to preserve their money. Most people think of this investment suitability when they are referring to their retirement accounts, but this should also be used when investing for any goal. Goals can include retirement, paying off debt, making a donation, making a purchase, or paying for education. Continually monitoring progress towards your goal(s) can help save you from surprises if you have not saved enough or if the market makes a sudden move shortly before you access your money.

A common savings goal is to pay for education and the common vehicle for building up dollars to pay for education is the 529 College Savings Plan. A person can contribute after-tax money to a 529 Plan for the benefit of a beneficiary student and withdraw the money to pay for qualified education expenses. The money can grow tax-free and the withdrawals are not taxed if they are used for qualified education expenses. Over the last few years laws have changed that have expanded your ability to withdraw funds from a 529 tax-free. Some of the more recent changes include the ability to pay for up to $10,000 in student loans for the beneficiary or being able to pay up to $10,000 to a sibling’s student loans. Another change includes the ability to use 529 funds to pay for an apprenticeship that is recognized by the federal labor department. But probably the largest change is the ability to use 529 savings to pay for up to $10,000 per year per student toward private or public elementary, middle, or high school tuition. This change could be especially helpful if tuition is due and you find yourself running short on available funds. You also may be seeing that your child is going to have plenty of scholarship money to pay for their education and it is clear they will not be using a portion of the 529 for college expenses. In this case you could allocate a portion of the 529 to go to the shorter-term goal of paying for high school tuition. There are important pieces of information to keep in mind before depleting your child’s college fund to pay for pre-college schooling. The 529 was created as an investment vehicle designed to create tax-free growth for the long-term. By using 529 funds now you lose the opportunity to potentially grow your money tax-free. Additionally, you can change the beneficiary of the 529 plan and use the money for another child’s education. Just because one of your children will not need the money for college does not mean another one of your children will not need it. I think people sometimes do not realize the “other” expenses that come along with sending a child to college. Outside of basic tuition you will need to cover housing, meals, books, a computer or tablet and other expenses. Some scholarships will cover some of these things and some will not so it is important to know all the potential expenses you may have and the options available to cover them.

As I covered earlier, it is important to match up your goals, time frame and investments so everything aligns with your risk tolerance. If you decide to allocate a portion of your 529 for pre-college expenses you need to make sure the funds are in line with the shorter time frame in which they will be used. Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program.

Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. Non-qualified withdrawals may result in a federal income tax and 10% federal tax penalty on earnings.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Private Advisor Group, a registered investment advisor. Private Advisor Group and Retirement and Financial and Strategies are separate entities from LPL Financial. ♠