Section 5: Common 529 Mistakes
It is difficult to execute a “perfect” college planning strategy as there are often so many unknowns. However, it is very possible to develop a solid plan to save for your child’s higher education. As you think about the strategy that best suits your needs, consider the following common 529 planning mistakes.
Not timing 529 distributions with expenses. Without proper planning, a portion of your 529 plan funds could be classified as a non-qualified distribution and potentially subject to income tax and a ten percent penalty. The issue of timing withdrawals is especially prevalent during the December/January semester break. For example, if you withdraw money in December, but don’t pay the tuition bill until January, a portion of the funds may be considered a non-qualified distribution if the total 529 plan withdrawals for the year exceeded the qualified higher education expenses paid. As you compare distributions to expenses, remember not to double count the American Opportunity Tax Credit/Lifetime Learning Credit and also remember not to include any expenses covered by tax-free scholarships in your calculations.
Failing to keep good records. You’re not required to submit details of qualified higher education expenses to the IRS with your tax return. However, if you are later flagged for examination, you may be required to produce records of qualified education expenses. As you ensure your withdrawals don’t exceed expenses, don’t toss your receipts afterwards.
Starting too late. Many parents have goals to fund a substantial portion of their child’s education. Unfortunately, many parents also get a late start in saving. As the costs of college continue to increase, some parents are stunned to learn the monthly savings required to meet their goal. For example, based on the average cost and growth rate of a private 4-year college, parents of a 10-year-old would need to start saving over $1,600 per month to pay for college. Even with a newborn, the required monthly savings only goes down to half that amount. This simple calculator can help you get an idea of your projected costs.
Although managing a 529 plan is one of the easier components of the college planning process, the challenging part is often in developing a strategy to save for college that meets your objectives without sacrificing your other financial goals. As a core component of our wealth management program, we will work with you to explore your options and help you arrive at a college savings and investment strategy that fits your family’s needs.