Among families that are actively saving for their children’s college education, only 27 percent are using 529 plans and other similar accounts that can provide considerable tax advantages, according to a 2015 study from student lender Sallie Mae. Instead, nearly half of families saving for college are using general savings accounts.
Along with missing out on tax benefits, parents who are socking away funds in traditional savings accounts may lose out on potential growth from investing in stocks, bonds and other assets through 529 plans. For those who decide they’d like to get started with a tax-advantaged college investment account, the good news is that there are ways to quickly build a sizable 529 fund.
Take these [four steps before opening a 529 plan.]
1. Shop around: Though nearly all states offer at least one 529 plan, parents are not required to choose the plan offered by their home state and can decide to invest in any 529 across the country. In fact, choosing the right 529 — based on factors such as its accompanying fee structure, investment options and manager performance — can factor heavily into a parent’s savings potential.
And, says Joe Orsolini, a certified financial planner with Chicago-based College Aid Planners, so can state tax breaks.
“Families can deposit tuition payments into the 529 account before tuition is due and take it out once the holding period is up,” says Orsolini. “In my home state of Illinois, this provides a 3.75 percent state tax credit for parking your money in a 529 plan for as little as five business days.”
Like Illinois, 33 other states — including the District of Columbia — offer full or partial tax deductions for residents making contributions to their home state’s 529 plan. Meanwhile, Arizona, Kansas, Maine, Missouri, Montana and Pennsylvania offer their residents deductions for contributions made to any state’s 529. Those savings can be funneled back into the 529 account to keep it growing.
2. Enlist help: While parents of children nearing college age may have college-savings tunnel vision, family and friends may not be aware of the urgency — or of their ability to help. Aaron Hatch, a certified financial planner and co-founder of Woven Capital in Redding, California, says securing contributions from aunts, uncles and grandparents is one of the quickest ways to build up a 529.
“My clients have seen great success with this,” Hatch says. “Often family members will give more than they would have had they bought some toy or other gift. If family members team up and crowdfund a 529, the balance grows much faster. Some families even give money for Halloween or Valentine’s Day, in addition to Christmas and birthdays, so the money can really add up.”
Parents can get deposit coupons for their child’s 529 and distribute them to relatives, reducing the awkwardness of asking for money.
See how [others can contribute to 529 plans.]
3. Start big: For parents who have been saving up with a traditional savings account — or who can expect a large gift from friends or relatives — front-loading a 529 can be a great way to start seeing growth quickly.
Putting in a lump sum up front allows the beneficiary to enjoy the benefits of tax-deferred compounding on a larger principal amount, and the giver may still be eligible for the annual gift tax exclusion. “One person can make up to a $70,000 contribution in a 529 plan at one time, and married couples can contribute $140,000,” says Peter Lazaroff of Plancorp, a financial planning firm in St. Louis. “The contribution is treated as if it were made over a five-year period for gift tax purposes, as the gift tax exemption is maxed at $14,000 per year.”
Understand [who benefits most from 529 plans.]
Front-loading is also beneficial for estate planning purposes, says Lazaroff, as such a large gift is considered removed from the estate without reducing the estate tax exemption. “In other words, there is no immediate tax penalty for gifting that much,” he says.
4. Make it automatic: When parents are short on time to save for college expenses, sticking to a contribution schedule is one of the easiest ways to ensure that savings goals are met in time. When life gets in the way, even the best-laid plans can go awry. In those cases, automatic deductions that transfer funds from a checking account directly into a 529 make the process effortless.
“Even better,” says Lazaroff, “many state plans allow you to automatically increase the contribution over different time periods to help ramp up saving. The good thing about automatically increasing your payments into the 529 is that you can gradually accommodate higher levels of savings into your budget without feeling a dramatic pinch on your everyday spending.”
Trying to save for college? Get tips and more in the U.S. News College Savings 101 center.
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4 Ways to Grow a College Savings Account Quickly originally appeared on usnews.com