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How to Send Your Kids to College Debt-Free with a 529 Plan

Written by Samuel Taube
Posted May 5, 2019

Raising children is one of the most expensive things you’ll ever do. A 2013 USDA report estimated the total cost of each kid from birth to age 18 at $300,000.

And of course, the cost from birth to age 18 doesn’t include one of the single biggest line-item expenses of parenting: college tuition. Four years of higher education can add between $25,000 and $130,000 per kid, depending on where and how they go to school.

debt-free college, 529 plan, tableSource: The College Board

Now, of course, college isn’t mandatory, and neither is paying up front for it. But a 2015 study by the Social Security Administration shows that Americans with bachelor’s degrees earn $600,000 to $900,000 more over the course of their lifetimes. And the average student debtor is more than $37,000 in the red — why put that burden on your child if you can avoid it?

In other words, saving for your children’s college education is hard, but it’s also important and worth doing. Fortunately, there are a variety of tax credits and tax-advantaged investment vehicles available to you to help defray the cost.

Below, we’ll go over how these tax credits and investment vehicles work. Let’s start with 529 plans.

529 Plans

These tax-advantaged accounts, named for Section 529 of the Internal Revenue Code, are basically Roth IRAs for education. You contribute post-tax dollars to them, they compound tax-free, and then you make tax-free withdrawals from them for qualified education expenses. These include tuition, textbooks, and even student housing.  

529 plans always remain under the control of the person who opens and funds the account, not the beneficiary. Most states also offer tax incentives for contributing to an in-state 529 plan, and a few offer tax incentives for contributing to any 529 plan, as you can see in the map below.

debt-free college, 529 plan, mapSource: Merriman.com

The plans come in two types: prepaid plans and savings plans.

Prepaid plans aren’t really investment accounts, per se — they simply allow plan owners to purchase future tuition credits at today’s cost without worrying about inflation or tuition increases.     

Savings plans, on the other hand, are just like IRAs — they grow the plan owner’s money in the stock market to keep ahead of inflation and tuition increases.

Many 529 savings plans give investors a choice between age-based portfolios, static portfolios, and fund portfolios.

Age-based portfolios are a lot like target-date mutual funds. They start out with a heavy equity allocation, automatically adjusting to become more fixed-income-heavy as the beneficiary approaches college age.

Static portfolios are akin to balanced funds. They have a static mix of equities and fixed-income securities, as the name implies. And fund portfolios allow the plan owner to choose from a variety of mutual funds.

Opening a 529 plan gives your child a head start on financially preparing for college, and it gives you some sweet tax benefits, no matter which type of plan you choose.

But 529 plans aren’t the only tools available to help you save up for your children’s college expenses. Uncle Sam can also help by lightening your federal income tax burden once the kids are in college.

Education Tax Credits

If you or your dependents are in school, there are a couple of tax credits available to you.

The American Opportunity Tax Credit (AOTC) is a credit for qualified education expenses paid for an eligible student for their first four years of higher education. You can claim it for yourself or your dependents, and it’s worth up to $2,500 per eligible student, consisting of 100% of the first $2,000 spent and 25% of the next $2,000 spent.  

In order to be eligible for the AOTC, your student must be pursuing a degree at an educational institution in which they are enrolled at least half time.

They must not have a felony drug conviction and must not have previously finished four or more years of higher education (or previously claimed the AOTC four or more times). And you need a taxable income under $80,000 a year to receive the full credit.

The IRS also offers a Lifetime Learning Credit (LLC), a more general education credit that offers up to $2,000 per tax return for an unlimited number of years. In order to qualify for the LLC, you must have a taxable income under $67,000 per year.

You or your dependent(s) must be enrolled at an educational institution (undergraduate, graduate, or professional/technical) with the aim of earning a degree or improving your job skills to claim the LLC.

Income for Debt-Free College

529 plans and education tax credits can certainly help defray the staggering cost of a college education, but they have their limitations.

That’s especially true if you’re struggling to find the money to make contributions to a 529 plan.

Investors who need some extra income to help save for their children’s college expenses should check out Real Income Trader. Investment director Briton Ryle can earn subscribers as much as $50,000 per year in extra income. Click here to learn more.

Until next time,

Monica Savaglia

Samuel Taube

Samuel Taube brings years of experience researching ETFs, cryptocurrencies, muni bonds, value stocks, and more to Wealth Daily. He has been writing for investment newsletters since 2013 and has penned articles accurately predicting financial market reactions to Brexit, the election of Donald Trump, and more. Samuel holds a degree in economics from the University of Maryland, and his investment approach focuses on finding undervalued assets at every point in the business cycle and then reaping big returns when they recover. To learn more about Samuel, click here.

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