As a parent of young children, I know the anxiety that comes with projecting, and planning for, college expenses. Reports are widespread about the escalating costs of education and, I’m sure, many of you are already feeling the pinch. Higher education costs have, in fact, been rising faster than nearly everything else that we spend money on (and faster than most of our wages for that matter!).
Over the last 20 years, “College Tuition & Fees” have seen more price inflation than all categories except “Hospital Services”, including “Child Care”, “Average Hourly Earnings”, “Housing”, and “Food & Beverage.” It’s tempting to pick on the education system at this point but the higher education system in the United States is regarded as among the best in the world. Moreover, research indicates that costs are rising, not because of greedy college administrators but, rather, primarily because education is a very “people-heavy” industry. We, thankfully, haven’t yet found a way for robots to teach classes so the efficiency gains seen in other industries haven’t appeared in education.
We can’t predict when, or if, the robots will visit us in the classroom but we can use a valuable planning tool to help us set aside some money for future expenses (i.e., the 529 Plan). 529 Plans are tax-advantaged educational savings plans that are authorized by, you guessed it, Section 529 of the IRS tax code. They were created, from a policy stand-point, to encourage more people to seek higher-education. There are two types of 529 Plans. One is called “pre-paid tuition” in which individuals can essentially purchase future college credits at a pre-determined price today. Many 529 Plans have stopped offering this option given the challenge of projecting future tuition costs. The other category is called “educational savings plans.” In educational savings plans, savers get to set aside a certain amount of after-tax money each year which then grows tax-free until it is used. Moreover, there are no taxes when the money is extracted from the plan provided the money is used for “qualified educational costs” (e.g., tuition, room and board, books, etc.). A recent change to the tax law in 2016 further expanded the definition of qualified costs to include K-12 tuition costs at independent schools.
If you’ve researched 529 Plans, you may have noticed that plans can be obtained through brokers/advisers or directly from a State or Commonwealth. The latter is what we recommend at Patina Wealth (i.e., in Virginia this would be the plan called “inVest529”). The logic behind that choice is that the costs will be lower without sacrificing investment performance. In other words, by signing up directly, you avoid the “advisory fee” that is paid to Patina Wealth or others. In our opinion, it’s not worth paying this fee given that you won’t likely need to change the investment allocation very often. At Patina Wealth, we do not charge fees for assisting clients with setting up 529 Plans or in making re-allocation decisions. Rather, we are happy to provide assistance with these plans as a client benefit. So, if Patina Wealth is already assisting you with your investments, there is no additional fee from us for your child’s 529 Plan. If college is in your family’s future, don’t let this valuable tool go unused. We’re here to help when/if you need it.