It's a major milestone in any parent-child relationship: the college drop-off. Over the past few weeks, parents across the country have been delivering their wide-eyed freshman students to their new dorm room to begin their journey into adulthood. 

As you probably know, college is more important than ever. College graduates enjoy much better job security and opportunity, especially during economic downturns. And a college diploma opens the door to a lifetime of higher earnings. According to the Bureau of Labor Statistics, and using 2016 dollars, bachelor's degree holders earn nearly $1 million more over a lifetime than high school graduates. Those with professional degrees earn over $2 million more.  

But as you also know, college is expensive. Using The College Board's 2017 Trends in College Pricing, we learn that last year, the average public school tuition, fees, room and board was $20,770 and $46,950 for a private school. But for children born this year, college costs are staggering. The projected cost of a four-year college education for a newborn is $215,444 for a public school and a whopping $487,004 for a private school. Multiply those numbers by the number of children in a family and it's easy to see how crucial it is to plan early for this major expense.

Making the most of college gifts

Many of our clients are in the fortunate position to help their college-bound children or grandchildren. If that is something you're interested in doing, you probably want to consider the benefits of 529 plans.

A 529 plan is a college savings plan that offers tax and financial aid benefits. Much like a Roth IRA, after-tax contributions are invested and earnings accumulate on a tax-deferred basis. When used for qualified higher education expenses, distributions are not subject to federal taxes. The definition of qualified higher education expenses was expanded in 2015 to include computers and in 2017 to include up to $10,000 annually in K-12 tuition.

In 2018, investors can gift up to $15,000 individually, or $30,000 from a couple, to their family members without any gift tax consequences. But if you want your gift to be used for education purposes, a gift into a 529 plan provides additional benefits. 5 29 plans allow five years of tax-free gifts in one year - up to $75,000 per child from individuals and $150,000 from couples. And one large gift at a child's birth can pay for nearly all expected four-year public and private college costs.

Illustration assumes an annual investment return of 6% compounded monthly.  This example does not represent the performance of any particular investment.

529 plans offer estate planning benefits too. Contributions and investment gains are removed from the contributor's taxable estate. The account owner retains full control over the account and can change beneficiaries or transfer unused assets to other family members. 

Gifts to 529 plans can help families meet college costs while also reducing estate taxes, increasing inheritances and creating lasting legacies. If you're interested in learning more about how these investments might fit into your own financial plan, give us a call.