2017 Guide to Physician College Savings Plans
Physicians planning to save for college for their children (and maybe even grandchildren) take note: the College Board’s 2016 “Trends in Higher Education” reports the all-in cost of one year at a four-year in-state public college averaged $19,548 while private schools averaged a staggering $43,921… per year! Doctors planning to send two kids to a private college will need to earn about $700,000 pre-tax to pay that bill. Oh, and let’s not forget about graduate school.
Practicing Physicians Best Way to Save For College
Most practicing physicians have earned income and assets that cause them to have a high Expected Family Contribution (EFC), which prohibits their children from qualifying for need-based financial aid. If you are one of these physician families, you’ll need to do some financial planning to help your kids matriculate. When saving for college, a Section 529 college savings plan is the best vehicle for most physician families.
529 Plans Yield Tax Benefits for Doctors Saving for College
In many states, physicians receive either a tax credit or a tax deduction for contributions to Section 529 college savings plan. States that offer tax breaks include Colorado, Georgia, Idaho, Iowa, Kansas, Louisiana, Maryland, Michigan, Mississippi, Missouri, Montana, Nebraska, New Mexico, New York, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Virginia, West Virginia, and Wisconsin. Physicians located in California (which offers no tax break for in-state taxpayers) and states that have no income tax (Florida, Montana, Nevada, Texas, Washington and Wyoming) should look outside their states for the best plan.
Section 529 plan account balances grow tax-deferred and cause no current taxation. Qualified distributions—withdrawals made to pay college expenses including tuition, fees, books, supplies, a computer, other equipment and, to a certain extent, room and board—are tax-free.
529 Plans Offer Asset Protection for Physician’s College Savings
Doctors who are worried about getting sued need to know that 529 plans offer some creditor protection. Under Section 541(a)(6) of the federal Bankruptcy Code, certain contributions may be exempted from bankruptcy, depending on how much was contributed, when it was contributed, and the relationship between the contributor (physician) and the beneficiary (student). Some states also protect 529 plan accounts from creditors. Consult with your estate planning attorney before relying on a 529 to shield your assets from lawsuit.
529 Plan Estate Planning Benefits for Doctors Saving for College
Physicians may contribute up to $14,000 per child ($28,000 for married couples) to a Section 529 college savings plan before exceeding the annual gift tax exclusion amount. In fact, a physician family can contribute up to $140,000 per child and then elect to treat the contribution as if it were made over a 5-year period. Since each contribution is seen as a completed gift by the estate tax code, college savings plan balances are removed from the doctor’s estate and thus are not taxable upon their death for federal estate tax purposes.
Mistakes Physicians Make When Saving for College
Physicians who intend to send their children to a private religious-based school should be aware that certain schools do not meet the accreditation requirements that would otherwise allow for tax-free withdrawals from the 529 plan. If you are not certain about your school’s qualifications, ask them.
Doctors with a 529 plan that holds more money than their families need for college may be required to pay a penalty and income taxes in order to make a nonqualified withdrawal from the account. For more details, see IRS Publication 970.
Physician families who procrastinate will find that they need to save much more each month than families who start early. Starting when your child is six years old will mean you need to save 40% more each month than if you start when your child is born.