It may be cheaper to teach your child fencing, and it may be more convenient to transfer guardianship of your children to a willing party. However, we continue to think the best way to pay for college is saving, and the best vehicle for saving is a 529 plan. With the kids headed back to school soon, check in to be sure your savings plans are on track.
The state investment authorities who manage 529 plans have made some major improvements to their plans in the past few years. Illinois recently reduced its already low fees by about 50%. Investment options available through Illinois are at least as inexpensive as those that can be bought in the public market with the added benefit of tax-free compounding and a state tax deduction for Illinois residents. Utah's program, long a leader within the industry, has recently expanded access to fee-only investment professionals (like us at Midway) to help our clients manage their accounts. These are just two examples. The industry as a whole has trended towards lower cost and higher quality investments. If your state hasn't made improvements, weigh this against the benefits offered by those who have.
Another change you may have heard about is the use of 529 assets to pay K-12 tuition. This change took effect in 2018 on the heels of federal tax reform. However, not all states followed the Feds' lead, so withdrawals may be tax-free at the federal level but penalized at the state level. This varies on a state-by-state basis, and it allows for some interesting planning opportunities. Check with us if you'd like more information.
Finally, we feel we should explain why we never discuss that other college savings vehicle -- the Coverdell ESA. Coverdell accounts have an annual contribution limit of $2,000 per beneficiary. For nearly all students who will attend college, this will be insufficient.