By Julie Ford
This is the final article of our college savings series. Congrats for making it this far! One day not too far away, your kids are really going to thank you.
Let’s recap what we’ve covered in the last month. We’ve talked about 1) whether to save for college, 2) what type of savings account to use and 3) how much to save. This final article will provide quick tips on how to maintain and (one day) withdraw money from your college savings accounts.
5 housekeeping tips
Before you graduate from this topic, we'd like to share a few did-you-know tips and resources to help you maintain your 529 plan(s) until your kids head to college:
1. Annual Review: First, your 529 doesn't need tons of active monitoring, but you should check on it every year or so. Each state runs its own 529 plan with different investment options (you can research them here), and you don't have to choose your state's plan. So if yours stops performing well, or if a tax benefit is added or removed from your state's plan, you can always look around for another state's plan to use. You can compare fees, tax benefits and investment options for all state plans here. The 5-cap ratings here will give you a high-level sense of which state plans are good and which are just "meh" (the more caps, the better the plan). And this site will show you 5-year investment returns by plan.
2. Rollovers: You can roll over money from one 529 plan to another as often as once a year. So if you do select a new 529 plan and you'd like to keep all your college funds in one place, contact the new plan and they'll help you with the rollover process. It's a little bit tricky with tax rules though, so read more about this here before making any moves.
3. Investment Options: As James and Joseph age, you'll want their 529 investments to shift to a lower risk profile just in case there's an economic downturn right when you need to start using the savings. Do your eyes glaze over when talking about investments? If so, you might consider choosing a "target-date" or "age-based investment option" for your 529 plans. This is a mutual fund that will invest in a variety of ways for an appropriate level of risk given your child’s age. The fund will automatically move into less risky investments as college years approach. This is by far the most popular investment option among 529 account owners (though not every plan offers one). If you aren't currently using this type of fund but would like to, the IRS will let you change investment options for your 529 plan once per year.
4. Generous friends & family: Did you know 529 account owners don't have to be parents? For example, a grandparent, or even a generous friend, can also start 529 accounts for your children with their own names as the account owners.
5. Automate: Last, if you haven't already, it's a great idea to set up an auto monthly payment to your 529(s) in the amount you calculated in last week's issue. This way you won't forget to save. But remember, don't hesitate to pause your college savings at any point to focus only on retirement or emergency savings if needed.
How to withdraw money
Making a withdrawal is a pretty simple process. You'll start by calling the customer service number on your account statement, or you may be able to request a withdrawal through online access to your account.
Keep in mind that you shouldn't take out more than you need to cover "qualified expenses" and that you'll need to withdraw the money in the same calendar year that you pay for things.
Money can be withdrawn and sent to:
- You, the account owner, as reimbursement for expenses already billed
- The beneficiary (the student), as a reimbursement for expenses already billed
- The school, as a direct payment for bills received
There are pros and cons with each option. For example, there are some possible tax issues with option 1 and some scholarship and financial aid complexities with option 3. There are additional tax and financial aid complexities if the withdrawn money is coming from a grandparent-owned or non-parent-owned account.
Here’s an article with more information on how to best withdraw funds.
That’s a wrap!
Thanks for joining me on this series. I hope you found the information and resources shared in these articles helpful. Please reach out if you have additional questions. The days are long but the years fly. Enjoy your kids and try not to stress about college savings.