Blog Article

A Call for Education Planning

A Call for Education Planning -

By Geoff Curran, Wealth Advisor CPA/ABV, CFA®, CFP®
Published On 03/03/2016

Successful families agree that higher education is essential to the success of future generations, and they also realize that costs are only going to continue to rise. If paying for your children or grandchildren’s tuition is a must (similar to a liability), and you know the exact number of years until they start undergraduate or graduate school (their investment horizon), why not approach saving for their education like you would saving for retirement?

One such way to tackle this goal is through the use of 529 college savings plans. 529s are unique in that there are no income restrictions on contributions, and the contributions can grow and be withdrawn tax-free as long as the distributions go toward qualified expenses (tuition and fees, room and board, books, supplies, and equipment). However, the benefits to your family go much further.

In addition to providing Roth-like advantaged growth and withdrawals, 529 plan assets are also removed from the owner’s estate. This means if a parent or grandparent, who owns a 529 plan with a family member as a beneficiary, were to pass away, the value of the 529 plans would not be included in their gross estate1. And, the total contributions as of 2016 to individual 529 plans can be as high as $235,000 to $452,210 (Pennsylvania) per beneficiary, depending on which state you choose to open the plan.

The use of 529 plans instead of UTMAs or Trusts allows the investor to save on investment taxes (capital gains, dividends, and interest), plan for higher education for multiple generations of their family, potentially receive a state income tax deduction for contributions (if your state has an income tax), and remove assets from your estate, while maintaining control. Unlike other types of accounts, 529 plan beneficiaries can’t use the funds to go to Las Vegas or to purchase a sports car. The owner retains complete control and can feel confident that the funds can only be distributed to enhance their family’s education, i.e. human capital.

Funding for 529 plans can only be made in the form of cash, whether it’s a cash contribution, rollover from another 529 plan, or converting a Coverdell Education Savings Account (ESA). When making a cash contribution, it’s important to be aware of any gift tax consequences. To avoid having to use any of the lifetime gift tax exemption, you can gift up to $14,000 per year, or $70,0002 at one time ($28,000 and $140,000 if electing gift-splitting, respectively) by just using the annual gift tax exclusion(s). Lump sum investing with a long time horizon allows the greatest opportunity for growth; however, that may not be appropriate or realistic for your circumstances. Instead, similar to how you save in your 401(k) retirement plan, you can set up a systematic investment plan after meeting the initial minimum investment (most states vary from no minimum to $3,000) by making bi-weekly or monthly contributions of anywhere from a couple hundred to a couple thousand dollars. Over your child and/or grandchild’s childhood, through the power of compounding, that sum can grow into a considerable amount to meet future tuition costs. Any leftover plan assets can then be used for other family members’ education, or even for your own continued education.

If planning for the education of your children, grandchildren, nieces and nephews, or even for yourself is important, we recommend that you speak with an advisor to discuss the best way to plan for your family’s education needs.


1 If you contribute more than one years’ worth of annual gifts (>$14,000) and pass away before the gifting period is over (such as within 5 years of the gift), then the remaining years’ worth of gifts will be included in your gross estate.

2 Five years’ worth of annual gifts or $70,000 ($140,000 if electing gift-splitting) can be made at one time without triggering any gift tax consequences.



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By Geoff Curran, Wealth Advisor CPA/ABV, CFA®, CFP®

Geoff has always enjoyed talking with people about finance, learning about their investments, financial strategy, and business sense. His interest only deepened with time, and what began as a hobby has now become a life-long passion, with an unparalleled passion for continuing education that makes him an expert in many subjects from traditional taxes and investments to business succession planning and executive compensation negotiations.

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