Like many of you, Colleen and I have children who we hope to send to college. And like some of you, we have a significant amount of liquid cash and investments. Mathematically, it would probably make a lot of sense to front-load the 529 plans for our two girls, or at least one of them. Here’s how it works: The 529 plan (or Qualified Tuition Program in IRS-speak) has a little known and less used five-year, front-loading option. With this option, you can put up to five years of gift-tax-exempt funds into your 529. The current gift tax exemption is $14,000, so this allows you to deposit $70,000 per parent or $140,000 total. Given that the funds in a 529 grow tax-deferred if used for education purposes, this is a pretty powerful tool. If a $70,000 contribution grows at a modest 5% annually, you will have just over $168,000 in your account come time for college. For comparison purposes: Full freight at Harvard University currently costs more than $58,000 per year for tuition and fees, and the average state school costs more than $21,000 per year for out-of-state students. With a single contribution, you could send your child to virtually any school they chose in 18 years. Despite these powerful benefits, I don’t know anyone who has taken advantage of the lump-sum option. Here are the reasons I think people shy away from it:
Logically, I know that most financial aid goes to the neediest students and the “best” students. That leaves average students of above-average income more likely to shoulder the burden by themselves. This is where many of us will fall. That means we could benefit by using the lump-sum contribution option. But we probably won’t. Sometimes it’s not about the odds. Chalk this one up to the all too common foible of hope over experience. Take Care, Brian McCann, CFP® Future Harvard Alums?
This post was originally published on Nerdwallet.com. This article was posted in The Christian Science Monitor. Comments are closed.
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