Provided By Matt Harlow, CFA, Chief Investment Officer at Larson Financial Group

College tuition continues to rise. Over the past 30 years, the average annual increase for college tuition has been 1.9% to 5% above the rate of inflation as measured by CPI according to College Board statistics. This long-term trend shows no signs of being reversed anytime soon. As a result, a pressing concern for many parents is whether they’re saving enough money for their child’s college education. The ever-shifting landscape of tax laws and college education funding rules only compounds this uncertainty.

529 college savings plans can offer attractive tax-advantaged benefits, however, a recent survey by Edward Jones found that 70% of Americans aren’t aware of these investment vehicles. Currently, there are over 50 different 529 college savings plans, with the onus for implementing these on the individual states.

Searching for the Ideal 529 Plan

Not only does money contributed to a 529 plan accumulate tax-deferred, but the earnings withdrawn are not taxed at the federal level as long as it’s being used to pay for qualified expenses. Many states incentivize the transaction by offering tax deductions on 529 contributions on your state income tax return. Five states (Oklahoma, Oregon, Georgia, Mississippi, and South Carolina) even allow you to take the deduction on the previous year’s tax return as long as the contribution was made by April 15th of the following year.

Financial Planning for Doctors

Many states are making this incentive even more attractive by increasing the value of the deduction. For example, in 2013, Arizona increased its deduction of $750 to $2,000 a year for individual tax filers and $1,500 to $4,000 a year for joint filers. Other states are in the process of taking similar action. However, there may be other considerations aside from tax breaks to weigh, which is why families are encouraged to consult with a qualified financial advisor.

Six states (Missouri, Kansas, Maine, Montana, Arizona and Pennsylvania) even allow one to claim a deduction for contributions to a 529 plan from other states. Residents of these states have the opportunity to shop around for plans with minimal administrative and investment fees. Nevada, for example, has an institutionally-managed portfolio of exchange-traded funds which allows them to keep their costs low.

Due Diligence

529 Plans also vary in the investment options they offer. Plans can be customized with a wide variety of investment options that range from conservative to more growth-oriented to match various risk tolerances. Some 529 Plans offer aged-based portfolios that automatically adjust to more conservative holdings as a child approaches college age.

Some 529 college savings plans can be obtained directly while others are advisor-sold, meaning they are purchased through a registered investment advisor. Carefully read the 529 plan issuer’s official offering circular or prospectus before investing.

Gifting from family and friends is made easier by the e-gifting program for 529 plans, available in 11 states. Once an account is opened, relatives can be emailed a link where they would enter their banking information and make a direct contribution to the account. There is usually no fee for this service (unless you’re using a 3rd party gift conduit), and the relative making the contribution is also eligible for a potential tax break.

Advisory Services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC.

Information gathered from sources believed to be reliable but is not guaranteed. Any information or opinion contained herein should not be construed as an offer, recommendation or solicitation to invest. Information provided is not to be deemed tax or legal advice. Consult your legal, tax and investment professionals for personalized advice.