Back to School: Are You Prepared Financially?

While the smell of crisp fall air and freshly sharpened pencils can be exciting, for many folks, it means another tuition bill is coming. And with tuition fees for public four-year institutions rising at an annual rate of roughly 3.1% (outpacing inflation), saving enough to stay on track is becoming harder and harder.

What are some ways to stay ahead?

There are many educational investment plans that offer tax and financial aid benefits, such as the 529 plan. These plans came about in 1986 and were named after Section 529 of the Internal Revenue Code (IRC), which authorizes tax-free status for qualified tuition programs. While designed with higher education in mind, they can be used to save tuition for K-12, as well.

These plans are generally administered on a state-by-state basis and can be used toward thousands of eligible colleges and universities across the country. From a tax perspective, federal tax law provides special benefits, such as five-year gift tax averaging and tax-free qualified distributions.

In terms of investing, they operate like other savings vehicles but have one major restriction: the money needs to be used for educational purposes. While this may seem obvious, it’s worth noting because if you spend years saving and contributing to a 529 plan and then you (or the beneficiary) decide not to spend that money on education, fees will apply.

Back to school is also a time of year to think about saving, in general. While it can be overwhelming to think about education costs in addition to general costs of living, college savings plans can be a useful way to complement other savings – like you use a 401(k), IRA or other plan to save for your retirement. Having a robust savings plan that encompasses college savings, retirement savings, health savings accounts and emergency savings can help you be prepared for significant expenses in life.

To learn more about saving and investing topics, visit our Learning Center.

The material in this blog is presented for informational purposes only. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.