1. Not using a 529 plan to save for college
If you’re not using a 529 plan to save for college, you could be missing out on:
- Federal tax-free earnings growth
- Tax-free withdrawals
- State tax deductions or credits on contributions
- Full control of the funds in the account
- No income or annual contribution limits
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2. Not considering 529 options from every state
- You can open a 529 plan in any state, no matter where you live.
- The beneficiary can use the funds toward college expenses in any state, no matter where you purchased the plan.
- Start by looking into your own state’s plan, many offer special tax incentives for residents.
- However, don’t ignore other options from other states that may have lower fees and expenses.
- Savingforcollege.com offers an easy way to research plan options by state.
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3. Forgetting about fees
- While 529 plan fees have been declining in recent years, if you’re not careful they can still eat away at your investment returns.
- The average fees charged by a direct-sold 529 plan are around 0.54% (1.47% for broker-sold plans) and include:
- Maintenance and administration fees
- Expenses of the underlying investments
- Sales charges for broker-sold plans
- Account maintenance fees
- Our 529 Fee Study can help you compare costs to find the best plan to suit your needs.
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4. Failing to give your account regular checkups
- Age-based portfolios will automatically shift your investment allocations to appropriate asset classes based on the age of the beneficiary (think: stocks for young children and less risky fixed-income investments as college gets closer).
- If your plan doesn’t offer an age-based option, you’ll have to make the adjustments yourself or with the help of your financial advisor.
- You should also adjust your contributions if there have been any updates to your family situation such as a change in household income or more children to save for.
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5. Counting on scholarships
- While many students do receive athletic and academic scholarship awards, it’s usually not enough to cover the full costs of college.
- NCAA athletic scholarships are only awarded to around 2 percent of high school students.
- The average amount awarded by the NCAA is only $11,000, which typically wouldn’t even cover one year of tuition.
- Even if you feel strongly that a scholarship is in your future, it’s best to play it safe by saving with a 529 plan to cover any leftover balance.
- In the event that the funds are not needed, the earnings portion of a nonqualified withdrawal made up to the amount of the scholarship will avoid the 10 percent penalty tax, but the earnings portion will still incur income tax.
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6. Not counting on scholarships
- According to the College Board, about two-thirds of students receive grants or scholarships with an average amount of over $12,000.
- While there is no guarantee that any student will get a scholarship, it’s important to keep the possibility in mind when planning your savings strategy.
- Use our college cost calculator to estimate what your future costs will be. Try not to overfund your 529 account since the earnings portion of any non-qualified withdrawals will incur income tax as well as a 10 percent penalty.
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7. Taking non-qualified withdrawals
- Qualified expenses include:
- Tuition for any eligible institution, including some summer school classes, study abroad programs, community college classes Books
- Supplies and equipment needed for course enrollment
- Equipment required for special needs students
- Some room and board, as long as the student is enrolled at least half time
- Be careful not to “double dip” if you or the beneficiary are claiming the American Opportunity Tax Credit or Lifetime Learning Credit.
- The earnings portion of all non-qualified withdrawals will incur income tax and be subject to a 10 percent penalty.
- There are exceptions to the 10 percent penalty, including when a student receives a scholarship, dies or becomes disabled or chooses to attend a U.S. military academy.
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8. Procrastinating
- It’s never too early (or too late) to open a 529 account.
- If your child isn’t born yet, you can open an account in your own name and change the beneficiary later. A child’s first year is a perfect time to ask friends and family to help. Contributions to a college fund make great baby shower, baptism and first birthday gifts.
- With 529 plans, waiting to save could cost you significantly:
- With today’s college inflation rate at 4%, in 10 years the average four-year public school is expected to cost over $145,000.
- If you start saving immediately, you will need to make monthly contributions of around $665 to cover the total costs (assuming a 6% annual return).
- However, if you wait just two years to start making contributions, that number jumps to $840.
- Plus, since you missed out on tax-free earnings growth over the last two years, you would end up having to contribute a total of $7,000 more over the life of the plan.
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