Naturally, we all want the best for our children, right? We all want to give them the opportunities they need to really make something of themselves. For most families, that includes the goal of sending our children to college. But when students are spending an average of $99,417 for their degree (and some top-tier universities cost that much per year of study), saving for our kids’ college education has become another one of life’s necessary expenses.
Sure, we could choose to let them bear the weight of the debt afterwards instead of planning beforehand. After all, dealing with debt is just part of adulthood, right? 45 million students and graduates currently owe a collective $1.6 trillion in student loans, making it the second highest debt category, behind mortgage debt. And I don’t know about you, but I think that encouraging kids to accept a life of debt is a pretty unfavorable way to send them out into the world.
However, if you can start thinking about it with enough time to spare, you’ll find saving for college much easier. 529 plans are tax-advantaged savings vehicles just for the purpose, and you can use other accounts (like a Roth IRA) to save for college too. 529 plans are state-run savings accounts for educational expenses, but you can choose which state’s plan you use, no matter where you live. So what are the options for 529 plans in Alabama, and how do they compare to others?
The Key Points You Need To Know About 529 Plans in Alabama
- 529 plans are tax-advantaged methods of saving for college fees and educational expenses
- 529 plans vary from state to state, and you can use any of them – but you might get better tax advantages if you stick to your own state’s plans
- Your contributions are considered gifts and can be made within gift exclusion limits. 529 plans allow you to frontload or superfund multiple years of gifts
- There are two 529 plans in Alabama to choose from, you should only use the directly purchased or College Counts Plan
What is a 529 Plan?
529 plans can be used to pay for any educational expenses incurred from kindergarten through to the end of university. They’re typically held by a parent or grandparent on behalf of a child. Each child needs their own separate 529 plan, as each account can have only one beneficiary.
Investment earnings and withdrawals from a 529 plan aren’t taxed, if the money is used on educational expenses. If you do want to use it for other purposes – say, for example, your dearly beloved child decides against going to college – you can cash it out, paying the taxes due on the money and the 10% penalty.
There are two types of 529 plans – savings accounts and prepaid tuition plans. Savings accounts are just that – “set and forget” investment accounts that money gets paid into and accrues interest. In most cases, you can use the money for educational expenses in any state at any institution.
Prepaid tuition plans act as a kind of price guarantee. While they are also investment savings accounts, they work differently. Available in most states, you can identify the institution that your child will go to in the future, and lock in their tuition fees at today’s rates. Then you save towards those. This can be advantageous as fees tend to rise annually, so the earlier you can start putting money away, the better value you’ll get later down the road.
There are no annual contribution limits to 529 plans, but some plans have limits as to the total amount you can save in the account overall. You’ll need to look at the individual plans for details. Though the plan had a high limit, the annual exclusion amount prevents any single individual from giving more than $15,000.
529 Plans In Alabama
529 plans vary from state to state, and you’re not restricted to just using the ones in your own state, or even the state that the future education might take place in. However, the tax rules can vary in different states. Contributions to 529 plans are not tax-deductible for federal tax purposes, but your own state may offer you state tax deduction or credits if you invest in-state.
There are two 529 savings plans in Alabama. There is currently no prepaid tuition plan available. You can make unlimited contributions to both accounts, provided that the total amount in the account is not greater than $475,000. As an AL resident, contributions to both a deductible against your state taxable income up to a maximum of $5000 for single filers or $10,000 married, filing jointly.
Firstly, there’s the CollegeCounts 529 Investment Fund. This is a well thought-out fund with a large variety of portfolios available, with the aggressiveness or caution of the portfolio dependent on the age of the beneficiary (i.e. how many years they have left until the investments will be needed). This is a 529 plan for Alabama residents that will be a good savings vehicle, wherever you’d like your dearly beloved to go to college. This plan has no enrollment fee.
A fiduciary advisor can help you coordinate your contributions and the tax implications of them, as well as any future withdrawals, with all your other finances. They’ll help you choose the right 529 portfolio to match your risk tolerance and be able to see the whole landscape of your other financial objectives.
The other option is to go through a commissioned salesperson using the CollegeCounts 529 Fund Advisor Plan. We recommend using the aforementioned plan and avoiding this one due to the higher expenses.
To have a look at how these options compare to other 529s across the country, check out this map.
529 Plans for Grandparents
Because you’re able to contribute to a 529 plan on a gift-giving basis, 529 plans are a great way to hand down some of your legacy to the next generations. Provided you’ve not given the same beneficiary other gifts with monetary value in the same year, you can gift up to $15,000 each year, staying within the gift exclusion limits and not affecting your lifetime Estate tax exemption.
It could also help the grandparents that when calculating state tax, the contributions to a 529 are tax-deductible in Alabama as well as some other states. In addition, overall education expenses could come down too, because the money in a grandparent-owned 529 plan doesn’t count against the child when they’re applying for financial aid.
It’s important to coordinate with the parents and grandchildren regarding ownership. Assets owned by a grandparent are treated differently from those owned by a parent.
Need Some More Help?
Researching 529 plans can be time consuming and feel overly complicated. It’s also essential to make sure they’re a good fit for your whole financial picture, too.
If you’d like more information about 529 plans in Alabama or help setting one up then please don’t hesitate to get in contact. We can work with clients nationwide, and we can give financial advice in Alabama and beyond. So don’t let the geography worry you as well as your finances – get in touch today, and we’ll be really happy to see how we can help.