From Seed to FlowerSubmitted by Fountain Financial Associates | Financial Advisors on September 26th, 2019
Posted by Chris Riley in the FFA Fall 2019 Newsletter
This is quite the memorable fall for me, as my youngest daughter begins her freshman year of college. From curly-headed toddler to beautiful, intelligent young lady went by far too fast. I am very proud of who she’s become through her strong faith, independence, belief in herself and hard work. I’ve had the good fortune to see scores of other young men and women pursue their higher education over the past two decades, and while some things most certainly change, the core tenets of education and gaining lifelong wisdom still remain. It is a time of life that many of us will never forget nor will our children and grandchildren, as they mature towards adulthood.
In 2001, 529 college savings plans underwent a huge transformation, as the Bush tax cuts allowed earnings inside college savings accounts to not only grow tax-deferred but to be distributed tax-free if used for qualified education expenses. My daughter was just an infant at the time, and we decided that it was a good plan to save what we could for her future education. Granted, it seemed a long way out at the time, but we went ahead and jumped into a college savings account, drafting $100 a month and increasing that amount when we were able over the subsequent years. Nothing too exciting or fancy either, as there were absolutely no changes in the investments themselves or attempts to outsmart the market. We reduced the allocation to something less risky as college drew near but only using the old standby investment options that we had started with. Along the way, we witnessed the DotCom Bubble, 9/11 and the 2006-2009 Financial Crisis. That may not have been one of the best 18 years in recorded market history, but through the middle of 2017, a 7.63% average annual return and a 160% total return looks pretty good. The cost of college has been growing at a clip close to 6% annually so far in the 21st century, so keeping pace with that inflation only increases the importance of planning ahead. Planting those seeds early and often are what provides those blooms down the road. My story is just a repeat of what we’ve been seeing over and over again over the past 20 plus years.
College savings plans are tremendously impactful investment tools for parents, grandparents, and young people to take advantage of the combination of time, compounding and tax-favored treatment that starting early can generate. The 2018 tax reform has now expanded the usefulness of 529 Plans and made them even more compelling. Since their creation in 2001, 529s could only be used for post-secondary education expenses. But now, for the first time, these accounts can be used for eligible K-12, undergraduate and graduate schools (up to $10,000 per year per student for K-12 tuition). Contribution limits remain the same, allowing for annual contributions in 2018 of $15,000 for single taxpayers and $30,000 for those married filing jointly. Some taxpayers might consider making five years of contributions ahead of time, amounting to $75,000 for individuals or $150,000 for couples. We consistently beat the drum for these plans here at Fountain Financial Associates and with a new school year upon us, it certainly bears repeating. And if we can make it work over these past 18 years, there’s a pretty good chance it will continue to be a smart choice in the future. There is no shortage of available resources to help project these future expenses, but the simple truth is that we have no way of knowing precisely the future of education costs or market returns, not to mention the expanding gap between public and private education costs. Our best advice to clients is to just get started with contributions knowing that the best time to begin is always today. We’re here to answer questions and help with details, so don’t wait. Start planting today.