Smart Savings: Prioritizing Retirement and Your Child’s Education with 529 Plans

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This week’s insight focuses on saving for your kids’ or grandkids’ future college costs.

I couldn’t let May 29th go by without honoring that special holiday in the financial planning world. Why’s that date important? Really, it’s not, but financial advisors use it to harp on the benefits of 529 college savings plans to their clients. To be clear, there are many ways to pay for college, and student loans are not the worst thing in the world.

You only get one shot at your retirement, though, so it’s generally wise to prioritize your future first, then take care of your child or grandchild. Think of it like when you’re on an airplane—putting your mask on first, then helping the kids with theirs.

But with the rising cost of education, now near $30,000 annually for an in-state four-year public university, too many young people today are saddled with a major debt burden when they enter the workforce. A 529 plan helps prevent that. It is among the most popular ways to save for college, mainly due to its tax advantages.

529s offer tax-deferred investment growth and tax-free withdrawals when the cash is used for qualified education expenses. While there is no state tax benefit here in Florida (since we don’t do the whole state income tax thing), 529s can still make sense for families. For high-income taxpayers, 529s are particularly useful as there’s a high $418,000 plan contribution limit per beneficiary.

Consider this: if you invest $10,000 within a 529 plan and earn 9% annually, by the time your son or daughter is a junior in college, the account would be worth more than $56,000—tax-free. Compared to investing in a regular brokerage account and assuming a 15% tax rate on capital gains, the cumulative savings is close to $7,000.

While the $7,000 tax benefit is significant, the key takeaway is to start saving and investing early. Florida residents should also consider the state’s Prepaid Plan, which locks in the cost of tuition and most college fees. Furthermore, if your child does not attend college or use the funds for K-12 tuition costs, up to $35,000 can be rolled into the beneficiary’s own Roth IRA.

Final PSA: Just be sure that your retirement nest egg is in a good spot before helping your kids.