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How to Maximize College Savings

Most parents agree that college is a worthwhile, albeit expensive, investment in their child's future. In fact, according to a recent survey from Sallie Mae, an overwhelming number of families1 are willing to stretch themselves financially to help with their child's higher education expenses.

 

The High Cost of a College Education

According to the College Board's "Trends in College Pricing 2023" report, for the 2023-24 school year, the average undergraduate tuition and fees2 ranged from $11,260 for in-state tuition at a four-year state school to $41,540 at a private university. However, actual costs can be much higher when you factor in room and board (averaging $12,770 per year for public universities and $14,650 per year for private universities), books, supplies and transportation.

Going on to graduate or professional studies can run the price tag up even more. According to the College Board's report, annual tuition and fees for a Master's degree averages anywhere from $9,250 at a public four-year college to $30,970 at a private university. And a Doctoral will tack on anywhere from $11,930 to $49,660 per year, respectively.

These eye-opening numbers cause many parents to look for new strategies to help pay those college bills.

 

Taking Advantage of 529 Benefits

One way that parents can save for their children's college education is through a 529 plan.

A 529 plan is a special investment account designed specifically for tuition and related educational costs. Using 529 plans for college savings and investing has become increasingly popular among parents due to their potential tax benefits and high contribution limits.

 

Tax Benefits of Saving in a 529 Plan

While contributions to 529 plans aren't deductible on your federal income tax return, the earnings within the plan grow tax-deferred. In addition, withdrawals from 529 plans aren't taxed as long as the money is used to pay for qualified education expenses.3 Those expenses include tuition and fees, some room and board, books, supplies, and computers and peripheral equipment (such as a printer, monitor, mouse, keyboard, etc.).

That tax-free growth makes a 529 plan much more appealing than saving for college in a taxable account. To illustrate, let's say you save $5,000 per year from the day your child is born until they go off to college 18 years later. Let's assume you earn an 8% annual return, and you're in the 24% tax bracket. Using CalcXML's 529 Savings Calculator,4 you find that by the time your child heads off to college you would have roughly $165,000 after taxes in a taxable investment account. On the other hand, in a 529 plan you would be able to accumulate just over $202,000 - giving you an additional $37,000 available for education expenses.

Many states offer a full or partial tax deduction or credit5 for 529 plan contributions, although some states require you to contribute to an instate plan to take advantage of the tax perks.

 

529 Plan Contribution Limits

The IRS doesn't limit contributions to a 529 plan, but each state sets its own aggregate contribution limit, which ranges from $235,000 to $550,000 per beneficiary.6

Keep in mind that contributions to a 529 plan are considered gifts for federal tax purposes, even if the money is put in by parents. Annual contributions over $18,000 per beneficiary7 must be reported on a gift tax return, IRS Form 709.8 Each parent can contribute up to $18,000 per year to a child without triggering the need to complete this form.

However, you also have the option of making a larger, lump-sum plan contribution. The IRS allows each donor to contribute up to $90,000 in one year9 (meaning two parents could collectively gift $180,000 at one time to each child) and elect to spread that gift evenly over that year and the subsequent four years. You won't be able to make any other gifts to the same beneficiary during that five year period without having to fill out a gift tax return.

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The IRS doesn't have a cap for contributions to a 529 plan, but state contribution limits range from $235,000 to $550,000 per beneficiary.

 

Choosing a 529 Plan

Choosing a 529 plan can seem complicated. After all, you can enroll in a program operated by your state or by another state.

For some parents, state income tax benefits are a big factor in whether they invest in their in-state plan or go elsewhere.

To make the decision easier, savingforcollege.com breaks down various tax deductions and other important categories that might work best for you.10 It's important to research because not all 529 savings plans are the same.

Another thing to consider, if your state's tax benefits are greater than the additional fees for your state-sponsored plan (compared to a plan you're considering in another state), you could benefit from staying in-state. Otherwise, you may want to look around for a plan that offers more investment options or lower fees.

In some cases, families might consider opening more than one account for the same child. A child can be a beneficiary of multiple 529 plan accounts.11 In fact, if both parents and grandparents want to contribute to the account, and they live in different states, the family might consider setting up plans in different states to maximize tax breaks in each state.

Having plans in two different states can also allow you to save more. Each state's contribution limit applies to the balance of all 529 plans administered by that state for the same beneficiary. For example, if a family has already maxed out the $350,000 contribution limit for one child in Tennessee, they can open a new account in South Carolina and contribute up to the $540,000 limit in that state.5

Once you pick a plan, opening the account is usually a pretty simple process. If you need help making sense of different plans or opening a 529 plan account, Synovus can help. Give us a call at 1-888-SYNOVUS (1-888-796-6887) to start the college savings conversation.

Important disclosure information

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

  1. Sallie Mae, “How America Pays for College 2023," accessed April 5, 2024. Back
  2. College Board, “Trends in College Pricing," accessed April 5, 2024. Back
  3. IRS.gov, “Tax Benefits for Education," updated 2023. Accessed April 5, 2024. Back
  4. CalcXML.com, "What are the advantages of a 529 college savings plan?" accessed April 5, 2024. Back
  5. Matthew Toner, “How Much is your State’s 529 Tax Deduction Really Worth?," SavingforCollege.com, updated November 26, 2023. Accessed April 5, 2024. Back
  6. Kathryn Flynn, “Maximum 529 Plan Contribution Limits byState," SavingforCollege.com, updated February 29, 2024. Accessed April 5, 2024. Back
  7. IRS.gov, “Frequently Asked Questions on Gift Taxes," updated November 23, 2023. Accessed April 5, 2024. Back
  8. IRS.gov, “Form 709," accessed April 5, 2024. Back
  9. Joseph Hurley, “10 Rules for Superfunding a 529 Plan," SavingforCollege.com, updated March 15, 2024. Accessed April 5, 2024. Back
  10. Mark Kantrowitz, “How to Choose the Best 529 Plan for You," Savingforcollege.com, published December 14, 2023. Accessed April 5, 2024. Back
  11. Kathryn Flynn, “Maximum 529 Plan Contribution Limits by State," Savingforcollege.com updated February 24, 2024. Accessed April 5, 2024. Back
  12. 529 College Savings Plan investments are offered through Synovus Securities, Inc. Information, including fees, expenses and sales charges on the particular plan you have selected, is available in the offering circular or official statement provided by the plan sponsor. Please read the information carefully prior to investing. Back