Warmer weather comes with a few traditions: well-kept lawns, baseball stadium lights, open windows. And every year in May and June you’ll see the balloons on stop signs and borrowed folding tables in the open garage, proud parents snapping pictures. The graduation party is a universal rite of passage.
This is that annual moment when the whole country seems to lean in and ask tomorrow’s hopefuls, “What are your plans?”
But what about this year?
We’ve all seen the viral videos of kids celebrating “prom in place,” dressing up in their ball gowns to take pictures in the living room. Graduations could look much the same under social distancing. How can you still make the graduate’s day special, even if you aren’t cheering them on at a grad party?
Take advantage of this opportunity to directly influence your grad’s education while also helping cultivate in them a generous spirit and strategic attitude toward money. Contributing to a 529 plan for graduation can help finance their future – and it comes with perks for you, the giver. Let’s dive into this tax-advantaged investment tool and valuable graduation gift.
Generation Z’s Defining Event
If you’re reading this, you’re most likely a Baby Boomer or Gen X-er. These generational labels, imperfect as they may be, help us to understand each other. They are often shaped by shared experience – the Vietnam War, the AIDS epidemic, 9/11. These events shape how we see the world, and even how we act financially.
Boomers might be a little more live-for-the-moment, X-ers are more cautious, Millennials are environmentally focused – several financial behaviors might characterize these different groups. Generation Z grads will be indelibly marked by the coronavirus in their coming of age.
This is a delicate time, and it is on our shoulders to help them through however we can.
Not Going to Graduation? Do the Math
Get out your pen and paper, and do a simple math exercise. What would you have spent to go see your nephew or third cousin’s daughter’s graduation?
- Flight – $400
- Lodging (two nights) – $200
- Food – $100
- Gift – $100
That’s $800 from the word go. Add to this a couple of days of PTO, and you’ll come out to over $1000 easily. We need to put this money to better use than simply stuffing it back in our pockets.
And parents? Renting a hall or a tent, catering, entertainment – the expenses for a celebration add up quickly. That leaves you with $1,000-$1,500 or so with no place to go or guests to host.
One of the ways to gift this money to your graduate is through a 529 Plan. This tax-advantaged college savings plan can help them defray the cost of education. Similar to a 401(k), the 529 Plan offers tax-free, penalty-free withdrawals for qualified expenses. It also grows similar to a 401(k) and will collect interest until your student is ready to use it.
On your end, there can be state tax advantages to 529 contributions. They are not tax-deductible at the federal level, but many states offer breaks. This can add up, especially if you make contributing a regular habit for the college and near-college students in your life.
Parents can take advantage of technology and use tools like Ugift. They put a code on the invitation, email, etc. and recipients can enter it at the website to contribute to the graduate’s 529 Plan. No personal information is exchanged, and there’s no charge for users. Other platforms like GiftofCollege and CollegeBacker offer similar options.
So, an invitation might not carry the time and place for the party, but it can give a code for a contribution to your grad. Of course, digital avenues like Twitter and email make this even easier.
A down market can give some advantage to a 529 plan as it can to a 401(k). It’s a kind of involuntary dollar-cost averaging in which you get more investment bang for your buck. Those shares cost less now than they did six months ago, and their value will most likely go back up before your student needs them.
You can also continue to contribute to a student’s education while they are in college. If they use the money for qualified expenses, it can stay in the account and grow indefinitely. You can make regular contributions and enjoy the tax benefits during their whole educational career.
Investing in Young People
Contributing to a 529 Plan for graduation is also a moment to influence a young person’s attitude toward education, generous giving and prudent money management. They will see you take money you could have pocketed and put it toward their education. They will also see you make a careful investment in their education, underlining the value of planning for the future.
We don’t want them to associate their graduation and quarantine, which will undoubtedly shape their life, with stingy panic from their loved ones. Instead, show them wise generosity – an example and legacy that will last long after we’re gone.
Now is the time to think strategically and creatively about finances, to walk away from panic and stand back to see the bigger picture. Don’t chase headlines, talk with your advisor – and keep washing your hands.
Need help with your financial plan? Get in touch today!
Investing involves risk, including possible loss of principal. No strategy assures success or protects against loss. To determine what is appropriate for you, consult with an advisor. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks, LLC, nor any of its representatives may give legal or tax advice
Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer’s official statement and should be read carefully before investing.
Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investing in any state’s 529 Plan.