529 plans: Not as puzzling as they seem

Piecing together an organized college savings plan on National Puzzle Day

529 plans: Not as puzzling as they seem

Tom RowleyThe holidays are finally over. Or are they? In reality, every day is a holiday — if you believe the websites that document this type of thing. There’s International Sweatpants Day, National Popcorn Day, Measure Your Feet Day and even Answer Your Cat’s Question Day. (That last “holiday” was Jan. 22, so you have an entire year to prepare for your next feline inquisition.)

Taken in context then, National Puzzle Day sounds pretty reasonable. We don’t know who conceived of this holiday — it remains a mystery, which seems appropriate — but we do know when it is: Jan. 29. What does all this have to do with 529 college savings plans? I can think of at least three things you need to do to be successful at both puzzles and college savings. Let’s take a look.

1. Make a plan

The first thing to do when starting a puzzle is to get organized: Separate the pieces and begin planning how you’ll approach it. You might want to sort the pieces according to color. Or maybe you’d prefer to organize them by lines, patterns or shapes. No matter the system, the key is to make a plan and get started.

Your approach to college savings requires the same kind of thinking — get organized, make a plan and get started. I can’t emphasize enough how important it is to begin planning for the expense of college as soon as possible. The cost of a four-year degree can easily eclipse $100,000. It will take time to build that up, so it’s never too early to start.

In formulating your plan, you’ll first want to consider what college savings options are available to you; for example, you might wonder whether a Roth IRA or a 529 plan makes the most sense to save for your child’s college. The two options look similar on the surface: Both allow earnings to grow free of federal taxation and offer a wide array of asset classes from which to choose. But there are key differences:

  • A Roth IRA has no restrictions on how funds are used once they’re withdrawn, while 529 plan funds must be used for college-related expenses.
  • Contributions to Roth IRAs are restricted by income limits; 529 plan contributions have no such restrictions — income is not a factor.
  • 529 plans generally have no annual contribution limits (note that each plan has its own lifetime limit, most $250,000 or more), while Roth IRA contributions max out at $5,500 annually for those 50 years of age and younger, and at $6,500 annually for those over 50.

And this is just the tip of the iceberg. You can compare 529 college savings plans to Roth IRAs and other college savings vehicles at CollegeBound529.com.

2. Identify your ‘corner pieces’

Any good puzzle veteran knows that laying the corner pieces first can help set the framework for the rest of the puzzle. Likewise, a 529 plan can serve as a corner piece for a college savings portfolio. There are other pieces to the college funding puzzle, of course — including financial aid, scholarships and part-time jobs — and all of these can supplement a 529 plan.

As a foundation for college funding, however, a 529 plan offers important tax advantages that can add up over time. 529 plan earnings are free from federal taxes, and some states even offer state tax credits for 529 plan participants. You can check whether your state offers a tax benefit on our interactive map at CollegeBound529.com.

3. Ask for help when the puzzle is hard

A lot of the work that goes into college planning rests on the shoulders of the future student — she has to make the grades, write compelling college essays and identify schools that are a good fit. And just as your student will come to you for help and guidance in these areas, you may need help with developing a saving strategy for college. That’s why I recommend talking to a trusted financial advisor about your total financial picture. An experienced advisor can provide guidance on tax considerations, estate planning implications and other important facts about your options.

The next piece of the puzzle

I could go on, but I’ve already stretched these metaphors like a game of Twister.

For next steps, call your financial advisor and visit CollegeBound529.com, where you’ll find more information and tools to help you in the college planning process, including our college savings calculator. You may also want to check out this IRS brochure on college savings plans.

A puzzle may look chaotic at first, but in the end you have the satisfaction of seeing the results of your labor. Saving for college doesn’t have to be puzzling. With a suitable strategy, you may someday be rewarded with an image even better than a finished puzzle: seeing your child or grandchild head off to college. Happy National Puzzle Day!

Read more expert views on college savings plans.

Important information

Blog header image: Dario Hayashi/Shutterstock.com

Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal tax penalty, as well as state and local income taxes. Tax and other benefits are contingent on meeting other requirements, and certain withdrawals are subject to federal, state and local taxes.

Before investing, carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the products, visit invesco.com/FundProspectus for a prospectus/summary prospectus.

For more information about CollegeBound 529, contact your financial advisor, call 877 615 4116, or visit CollegeBound529.com to obtain a Program Description, which includes investment objectives, risks, charges, expenses and other important information; read and consider it carefully before investing. Invesco Distributors, Inc. is the distributor of CollegeBound 529.

An investment in the portfolios is subject to risks, including: investment risks of the portfolios, which are described in the program description; the risk (a) of losing money over short or even long periods; (b) of changes to CollegeBound 529, including changes in fees; (c) of federal or state tax law changes; and (d) that contributions to CollegeBound 529 may adversely affect the eligibility of the beneficiary or the account owner for financial aid or other benefits. For a detailed description of the risks associated with CollegeBound 529 and the risks associated with the portfolios and the underlying funds, please refer to the Program Description.

CollegeBound 529 is administered by the Rhode Island Office of the General Treasurer and the Rhode Island State Investment Commission. Ascensus College Savings Recordkeeping Services, LLC, the program manager, and its affiliates have overall responsibility for the day-to-day operations of CollegeBound 529, including recordkeeping and administrative services. Invesco Advisors, Inc. serves as the investment manager. Invesco Distributors, Inc. markets and distributes CollegeBound 529.

CollegeBound 529 portfolios invest in exchange-traded funds, mutual funds and separate accounts. Units of the portfolios are municipal securities, and the value of the units will vary with market conditions. Investments are not guaranteed or insured by the State of Rhode Island, the Rhode Island Office of the General Treasurer or the Rhode Island State Investment Commission.

Thomas Rowley

Director, Retirement and Education Strategies

Thomas Rowley is director of retirement and education strategies and one of Invesco’s most frequently requested speakers. He provides analysis of the evolving retirement landscape and develops actionable strategies to help investors and financial advisors maximize their retirement-planning opportunities. Mr. Rowley regularly shares his insights online at invesco.com/us in addition to his speaking engagements.

Mr. Rowley’s insights reflect more than 20 years of experience in the investment industry. He translates his comprehensive knowledge of retirement planning into lively, clear explanations of the complexities of legislative, investing, tax and social issues.

Mr. Rowley shares his analyses of retirement-related issues through regular personal appearances, continuing education webinars and Web-based commentaries.

Mr. Rowley has been director of retirement business strategy since 2010. Prior to joining Invesco in 2010, he was in charge of individual retirement plan products and Retirement Marketing at Van Kampen.

Prior to joining Van Kampen in 1996, he was a 401(k) regional sales director with an investment firm. His experience also includes seven years in retirement plan operations and three years as head of a brokerage firm’s retirement help desk. He began his career in the Treasury bond futures pit at the Chicago Board of Trade.

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