Year-end moves for parents scared to save for college
When Sharon Doyle thinks about college savings for her two kids, the numbers are almost too big to comprehend.
Doyle, 44, recently calculated expected college costs for her three-year-old daughter. It worked out to be north of $500,000 - a whopping figure for even the most well-heeled Americans.
And now she has an eight-month-old son to add to the bill. "You can't even wrap your head around it," says Doyle, an entrepreneur based in Evanston, Illinois, who sells skincare products. Her husband Barry is a personal injury lawyer.
"Even if you only pay for half of it, that's still the price of a house," Doyle says. "It seems like no matter what you do, it's never going to be enough."
Call it parental paralysis. As the economy slowly recovers from the Great Recession, you would expect contributions to 529 college savings plans to be accelerating smartly, but they are not.
Some $2.5 billion was contributed to 529 plans in the second quarter of 2012, roughly matching the same period of 2011, according to Financial Research Corp., Boston.
But for the previous two quarters, total contributions were about $1 billion lower than they had been a year earlier, even as the economy has been supposedly improving.
These 529 savings plans work like state-sponsored educational piggy banks, using a variety of investments to cover educational expenses. They usually have low minimum-contribution amounts and offer significant tax advantages.
"Typically in recoveries, 529 contributions do pick back up," says Chris Stack, managing consultant for Savingforcollege.com, a website that ranks and monitors the plans. "But there's so much uncertainty right now that people are just afraid to commit."
JUST DO IT
That doesn't mean you should throw your hands up and do nothing.
Private four-year colleges now cost an average of $28,500 a year in tuition and fees alone, according to The College Board, and those prices will presumably rise in the future. That's why parents need to get over their psychological hurdles, and just do it.
After all, there's still time to play catch-up, and to lock in tax savings. But not that much time. College saving has to be done by December 31 to reap tax breaks for the current tax year. If you delay until January 1, then you will have to wait until April 15, 2014 for your pocketbook to see the results. You don't have to overextend yourself, say experts; just do what you can.
"Parents carry a lot of guilt about not being able to pay 100 percent of their kids' college (fees)," says Julie Casserly, author of "The Emotion Behind Money: Building Wealth from the Inside Out," and a Chicago financial planner. "They need to let go of that feeling of shame. If you need to save $400 a month for your kid's college, but your budget only allows for $100, then at least something is better than nothing."
LOOK TO YOUR STATE PLAN FIRST
While all 529 plans allow money earned within the plan to be withdrawn tax free to cover qualified college costs, many states heap an additional advantage on that, offering state tax deductions for initial contributions.
Some states, like Colorado or South Carolina, allow deductions for the full contribution amount.
Mississippi and Oklahoma offer a state tax deduction of up to a $20,000 for joint filers; in New York and North Dakota, it's a $10,000 deduction for joint filers.
That means 529 investors can shave hundreds or even thousands of dollars off their annual tax bills.
Indeed, the fourth quarter is traditionally the biggest time for 529 contributions, as parents get their checks in under the wire to take advantage of those tax benefits. Financial Research Corp projects that total contributions for 2012 will come in at a respectable $8 billion, despite the slow start to the year. Not quite the heyday of 2007, when inflows hit a record $14 billion, but still, a modest improvement over 2011.
Of course, you are also free to choose an out-of-state 529 plan, but that means forgoing those significant in-state tax benefits. That probably only makes sense if your state plan features heavy fees and limited investment options.
RED ALERT FOR WEALTHY GRANDPARENTS
This year also offers a unique opportunity regarding gift-tax limits.
In addition to yearly tax-free gift ceilings of $13,000 per person, there's also a lifetime exemption, traditionally set at $1 million. But current tax law has that exemption at $5.12 million, which means that wealthier parents or grandparents can pass along significant assets to their heirs with no tax hit whatsoever. Until December 31, that is.
Of course, 529 plans have maximum contribution limits well under those levels, but a college savings contribution can be part of a grandparent's gift. And if the intended recipient ends up not using it all for school, the balance can be transferred to another relative.
"For grandparents with multiple grandchildren, and who may have millions of dollars they want to pass along, 529 plans are one way they can take advantage of that before the end of the year," says Stack.
As for the Doyles, they have been earmarking any cash gifts from relatives for their daughter's 529, which already has more than $1,200 in it. They now plan to start a 529 for their son, and ramp up contributions as the economy recovers. Right now, though, they are focusing on more immediate priorities - like mortgage and utility payments.
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