When and how should I start saving for my child’s college tuition? As a dad, you will inevitably be faced with the question of saving for college (perhaps not even if, but how). There are several ways in which you can stash some shekels away to pay for college; and 529 Plans may be the most well-known.
Some people liken it to an IRA account, but meant for college tuition. That’s only slightly correct. While there are some similarities in the tax treatment, 529 Plans can often be nuanced, and differ from state to state. So here are 7 things you may not know about 529 Plans, specific to Nevadans:
1. 529 Plans are Investment Accounts, Not the Investments Themselves
Let me start by saying 529 Plans are not investments. They are used as an investment vehicle. The term 529 Plan refers to section 529 of the internal revenue code (26 U.S Code § 529), which defines the federal tax treatment of a qualified tuition program. So think of a 529 plan as a beer glass or mug of sorts. These can come in a variety of shapes and sizes. It can be a slender pilsner glass, a stalky beer stein, a diamond encrusted chalice, you name it. Regardless of the apparatus, it is awarded special federal tax benefits. For instance, you may choose Vanguard’s Nevada 529 Plan (beer stein). But depending on your situation, goals, and risk tolerance, you can invest in a variety of portfolios from conservative to aggressive age-based investments. So that’s like deciding which sort of beer you want to pour into that Vanguard beer stein.
2. Nevada’s Annual Contribution Limits are Higher Than You Think
A lot of people think that 529 Plans mirror an Individual Retirement Account (IRA), where you can only contribute $5,000 per year to an IRA. This is NOT the case for 529 Plans. Each state’s plans have their own contribution limits per beneficiary, but in the case of Nevada 529 plans the contribution limit is currently $370,000 across all accounts for a single beneficiary. However, beware that contributions in excess of $14,000 per contributor is subject to federal gift tax. Anyone can contribute to a 529 plan, so you can far exceed the $14,000 threshold by having your spouse, grandmas and grandpas, aunts and uncles, and anyone else interested in contributing to the plan.
3. No Tax Deductions/Credits for Nevada Contributions
There are no federal tax deductions or credits for ANY 529 Plan, regardless of state. However, it is very common for many states to offer tax deductions or credits for contributions (up to a certain state-defined amount) to their State 529 Plans. As you can imagine a state tax deduction/credit for Nevada contributions wouldn’t do much good for Nevadans because we don’t have a state income tax. This is not entirely bad though, because it opens the opportunity to invest in other state plans if you find them to be more suitable (yes, you can enter into 529 Plans from a different state).
4. Tax-Free Growth
Well, technically it’s tax-deferred growth, but the distributions become tax-free when used for higher-education expenses (post-secondary). This is largely the most beneficial aspect of using a 529 plan to save for college, especially if you start early. However, there is a downside. If the withdrawals are made for unqualified expenses, then you must pay the federal tax on the investment gains AND a 10% penalty of the gains as well (if your kid gets a full ride scholarship, the 10% penalty on withdrawals is waived). If college or trade schools turn out not to be in the cards for your kiddo, there are some flexible solutions you can employ to preserve the tax benefits and avoid penalty.
5. 529 Plans Are Transferable to Family Members
A 529 account will only ever have one account owner and one beneficiary. In the most traditional arrangement you, the dad (owner) are in charge of the account for the benefit of your child (beneficiary). You, as the owner of the account, hold all the rights as it pertains to which investment portfolios you choose within the plan, and who you choose to be the beneficiary (restricted to family). You will always be the owner of the account, but you can choose to change the beneficiary to any qualifying family member, such as another sibling, your spouse, your in-laws, your in-laws kids, nieces or nephews, aunt or uncles, or cousins. This is particularly useful in such events where your child is not bound for college and you want to preserve the tax-free gains and avoid the 10% penalty – you can simply change the beneficiary to another family member, or even to yourself!
6. It’s Not Just For 4-Year University
Even if your child is not bound for a traditional 4-year university, the funds in the 529 Plan can be used for community colleges, trade schools, and online colleges – and all related expenses.
7. The Nevada State Treasurer Offers Free Money for 529 Plans
The Nevada State Treasurer’s Office (STO) has what is called the Nevada College Kick Start program, where the STO uses a portion of program management fees (not taxpayer dollars) to open a SSGA UPromise 529 Plan with an initial deposit of $50. This is held on behalf of your child in a STO master account, and is available to every public-school kindergarten student in Nevada. Here’s the kicker – you must “claim” your child’s account by August 1st following your child’s 4th grade year, or else that $50 will be forfeited. So you have basically a 4-year grace period to claim this account, if this is the first you’re hearing about it.
You may be thinking, $50? That’s not very much! And you’d be right! However, this program was initially a hot-button when the pilot Kick Start Program was passed in 2013, and $50 was basically all they could convince the State Legislature to allow. There have since been initiatives to try and expand the program. For instance in 2017, Treasurer Dan Schwartz (now former Treasurer) proposed a matching incentive up to $1,500, where the STO would match dollar for dollar contributions to ANY Nevada State 529 Plan, in the Kick Start master account. This initiative was squashed during Legislative Session, largely due to political infighting and not based on the proposal’s merit. The point is, it’s definitely the worth “claiming” your child’s account if they fall within that 4-year grace period. If future proposals to expand the Kick Start program succeed in the future, you’ll be happy you spent the 5 minutes to claim your child’s account; and if nothing else, it’s a free $50 to cover some school supplies down the road. Claim your child’s account.
Disclaimer: There are a lot of considerations when it comes to 529 Plans and general personal finance. DO NOT base your investment decisions solely on the content seen here. I always advise doing your own research and I strongly suggest you speak to a financial advisor before making any major long-term investment or personal finance decisions. If you do not have a financial advisor, feel free reach out to me, and I can put you in touch with someone great!
This article was guest written by Steve Scheetz. Steve works at Employer’s as a Treasury & Investment Analyst.