Financial Planning Fridays #14: Investing for Education

Today, in our fourteenth episode, we wanted to talk with you about saving for college and the advantages of using a 529 College Savings account.

College costs are higher than ever and are expected to continue to increase. The average cost of a student living on campus at a four-year private, non-profit university is $54,501 per year or $218,004 total over four years according to

They also reported that the average cost of college has more than doubled since 2000 with an annual growth rate of 7.1%. If college costs continue to rise at this same rate, then the average four-year private university will cost more than $200,000/year when children born in 2022 head off to college.

The total four year cost will be almost $900,000!

A 529 plan, also known as a qualified tuition plan, is a tax advantaged plan that allows you to save for future education costs. There are two types of 529s, prepaid tuition plans and education savings plans.

Because they are more common and often more applicable, we are solely going to focus on education savings plans in today’s video.

An 529 education savings plan allows you to open an investment account to save for your beneficiaries’ future qualified higher education expenses.

These include tuition, room and board, and other expenses associated with education.

More recently, this can also include up to $10,000 per year, per beneficiary, for tuition at any public, private or religious elementary or secondary school.

And, although these contributions are made on an after-tax basis, these plans have a few tax benefits that make them attractive, especially for those with a longer runway to college.

Withdrawals used for qualified education expenses are not subject to federal income tax and in many cases, state income tax. Many states also offer a state income tax deduction in the years that contributions are made.

In total, you can save up to $16,000 per year, per beneficiary, in these plans. And, for married couples, this means that you can contribute $32,000 per year, per beneficiary.

However, an important consideration if you do decide to make a withdrawal from your 529 plan for something other than a qualified education expense, the EARNINGS will be subject federal and state income tax, as well as an additional 10% federal tax penalty. But, because the contributions went in in an after-tax nature, there will be no additional taxes or penalties owed on this portion.

To provide additional context for anyone wondering how much they may need to save, in order to fully pay for a four year private school education for a senior, graduating today, you would have needed to save roughly $421 per month from the time they were born if the investments had grown at the same rate of return, 9.03%, as the S&P 500 over the past 18 years.

If college costs continue to increase like they have, and the returns remain the same as the previous 18 years, then you would need to save about $1,740 per month to get to the projected $900,000 total future four year cost that we mentioned.

In that example, you would contribute about $375,000 and the remaining $525,000 would come from growth and dividends. By using a 529 college savings plan, you could save more than $100,000 in potential tax on those earnings.

Please forward this video to a friend who has children or grandchildren and may benefit from this discussion. Also, please feel free to reach out to us at any time to discuss a 529 college savings plan for you and your family.

Be on the lookout for our next Financial Planning Fridays episode. Subscribe to our Youtube Channel so you never miss an episode. Or contact us directly; schedule your 15-minute call with us today.