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Wherever Your Child Is Going After High School - Start Saving For Their Future Today!

Whether it’s a 4-year university, a community college, a vocational or trade school, an online degree, or perhaps even drone pilot school, preparing your child to make a living is going to cost some real money. Fortunately, there are “College” Savings Plans with tax benefits, called 529 Plans, and they aren't just for traditional, four-year colleges.

While many people think these plans are designed for four-year or degree-seeking schools, these plans are intentionally very flexible with qualifying institutions including all colleges, universities, vocational schools, postsecondary institutions, and international schools eligible to participate in federal student aid programs administered by the U.S. Department of Education. That list is surprisingly broad and beyond what you’d expect, some examples of qualifying nontraditional schools include the Golf Academy of America, the Le Cordon Bleu College of Culinary Arts, and the commercial diving program CDA Technical Institute in Jacksonville, Florida just to give you an idea of the diversity of opportunity.

The other concern regarding “College” Savings Plans is what happens if your child doesn’t use it, or use all of it?

There are multiple options starting with leaving it invested. The assets can stay in the account where they continue to have the opportunity to grow tax-deferred until your child decides to attend college in the future. There is currently no time limit on when funds must be withdrawn.

You could also change the beneficiary of the account to a sibling (or other qualifying family member), to pay for that child’s college costs. You could even change the beneficiary to yourself and pursue your own higher education.

You can also take the money back. However, if you take a non-qualified withdrawal, the
earnings portion of the withdrawal, if any, will be subject to ordinary income tax (at the beneficiary’s tax rate) and a 10% additional federal tax, and may also be subject to state and local income taxes. You are then free to use the funds any way you wish.

So what exactly is a 529 Plan, or a NextGen 529 Plan in Maine?

A highly educated workforce helps states attract good businesses and boost their economy. Encouraging families to save for “college” (or other schooling) is one way to build that highly educated workforce, and that is why states began creating special savings accounts just for education expenses: 529 Plans. Today, parents can choose from many different types of 529 Plans—some offered by their state and others by national financial institutions. Most 529 Plans help you save for college and others let you pre-pay tuition fees.

What are the benefits of a 529 Plan?

This depends upon what kind of plan you choose. Some plans have tax benefits while others have matching contribution opportunities. An MSB Financial Planner or Paraplanner can help you decide what instrument best serves your needs.

Another benefit is that the money you put in your 529 Plan is placed in different types of investments depending upon the plan you have chosen and the risk level you have selected. Like any investment, your balance will go up or down depending on current market conditions. And like any investment in mutual funds or stocks, most people will see noticeable growth over time.

 

As your investment earns interest, it will continue to grow, increasing your savings power over time. The sooner you put the power of compound interest to work for you the more impressive the results will be.

What can 529 Plan savings be used for?

What are qualified educational expenses? Technically, any expense needed for enrollment at an eligible institution of higher learning should qualify, but there are exceptions. Transportation to and from college or technical school is typically not considered a qualified expense, and neither is a student’s health insurance. In some states, 529 Plan funds of up to $10,000 per year can even be withdrawn to pay private school tuition prior to college.

It is important to understand what 529 funds can, and cannot be used for, because the penalties for withdrawing funds for unapproved uses carry financial penalties. If you have questions or concerns, speak to your financial advisor or an MSB Financial Planner or Paraplanner.

When should Maine families start saving for college with a 529 Plan?

College savings should not necessarily be your family’s first savings priority. We encourage customers to save up an emergency fund first, pay off high interest personal debt like credit cards second, and then start directing savings toward retirement, and then college funds. Remember that while you can borrow money to fund your child’s college education (either through federal student loan programs or by taking out a second mortgage on your home), you can’t borrow money for your retirement. If you are unsure of how to prioritize your personal savings, your Relationship Banker can coordinate a review of your financial plan with our in-house Financial Planners or Paraplanners.

Families in Maine also have an additional incentive to open a 529 Plan: a starting grant of up to $600!

Since 2008, all children born in Maine are automatically given a $500 grant from the Alfond Foundation for their future education. Families can open a 529 account with that money and add to it over time. Beginning in 2020, families are also given a $100 matching grant for taking the step of opening a NextGen 529 account. If you have a child born in Maine in 2008 or beyond and you have never taken the step of claiming their Alfond grant or have not taken the additional step of opening your NextGen 529 account, talk to your Machias Savings Bank Relationship Banker today to see if your child is still eligible.

There are an increasingly wide variety of paths Maine students can take after high school on the road to a career and toward earning a successful and viable living. Those involving further education cost money and often a lot of money. It’s truly never too early, or too late to get started. Learn if 529 Plans are the best option for you. Talk to our MSB Financial Planner or one of our Paraplanners today!

*not intended as legal or tax advice

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