How the South Carolina 529 Plan Works
As financial planners, we meet with many parents concerned about how they will pay for their child’s college education. These parents often ask about the Future Scholar program, the 529 college savings plan for residents of South Carolina. We created our educational savings guide below to explain how a 529 program works, the benefits of a 529 plan and the disadvantages of a 529 plan, and help you determine whether or not the SC Future Scholar Program is right for your family.
What is the South Carolina Future Scholar program?
Paying for college can feel like a monumental task for any family, no matter how financially comfortable they may be. Although tuition inflation in higher education has slowed in recent years, the price of a four-year college degree is still very high.
State governments have developed a special type of savings plan designed to help families save for this significant financial expense: the 529 college savings plan. In South Carolina, the plan is called the Future Scholar program, and it includes tax benefits designed to ease the burden of college tuition and encourage regular contributions.
How does a 529 Plan work
Any U.S. citizen can open a 529 savings account for a child regardless of their income level or their relationship to that child. There can even be multiple accounts for the same child as long as all combined contributions across these accounts do not exceed $520,000 in South Carolina. The maximum aggregate contribution limits vary by state.
Most 529 plans allow participants to deduct part or all of their contributions on their income taxes and contributions to the SC Future Scholar Program are tax-deductible on the state level.
And like any savings account, the money in a 529 account grows over time through additional contributions and interest earned. Unlike other savings accounts, however, the interest earned and the withdrawals you make are also tax-free.
Money can be withdrawn from a 529 college savings plan for tuition and fees, room and board, books, computers and other supplies required to attend any eligible institution offering post-high school education: two and four-year colleges, graduate and professional programs, and even certain vocation/technical schools.
Benefits of a 529 Plan
Disadvantages of a 529 Plan
How Do I Open an SC Future Scholar Program 529 Plan?
The SC Future Scholar Program is managed by a group called Columbia/Threadneedle, created by the merger of Columbia Management Investment Distributors of the US and Threadneedle Investments of the UK. Columbia Management is owned by Ameriprise, a national broker/dealer and financial service firm.
There are two ways to invest in the Future Scholar program. If you are a South Carolina resident, you can open and fund your accounts online directly with Columbia/Threadneedle or you can invest through the broker or your choice. See the sections on fees and expenses to understand the differences between these two approaches.
What is the Current Ranking for the SC Future Scholar Program 529 Plan?
Each year, Morningstar publishes a ranking of all 529 college savings plans across the country, awarding them gold, silver, or bronze status—or below. The SC Future Scholar plan landed solidly in the middle of the pack this year with a Neutral rank for the direct option.
If I Want a Gold 529 Plan, What are My Options?
The younger your beneficiary, the greater the value of lower fees and better fund selections. South Carolina residents can get the biggest bang for their buck by opening and contributing to the SC Future Scholar Program to capture state income tax savings. As their child approaches college age, they can execute a custodian-to-custodian transfer to a better 529 plan, such as the gold rated Utah Educational Savings Plan. Because a custodian-to-custodian transfer is not taxable, you can have your cake and eat it, too.
How Do I Get the Most Out of My SC Future Scholar Program Plan?
How Do I Calibrate My Investment in a SC Future Scholar Program Plan to Maximize My Investment or Manage My Risk?
Because you can only change the investments in a 529 plan twice each calendar year, many investors choose to select an age-based or a risk-based portfolio that is rebalanced by the plan administrator. The SC Future Scholars Program plan offers the following asset allocation portfolios:
The age-based portfolios are divided into Aggressive, Moderate, and Conservative tracks. Different asset allocation portfolios can be used at different ages to create a glide path toward your child’s college entrance date.
If you purchase share through a broker, there are some small differences in the allocation portfolios because they offer some actively managed fund choices not available to direct buyers.
Ready to take advantage of significant state income tax savings while creating future educational opportunities for a child? Talk to Oak Street Financial Advisors about the best way to set up and calibrate your SC Future Scholars Program 529 Plan today.
The tax plan passed at the end of 2017 has a bonus for parents whose children attend private elementary and high schools. You can now use funds from a 529 savings plan to pay for these expenses, up to a maximum of $10,000. In South Carolina and other states that allow a tax deduction for 529 plan contributions, this change can mean significant savings on your state income taxes.
For example, the Charleston, SC both Porter-Gaud and Ashley Hall have high school tuition that exceeds $23,000 per year. By using the SC Future Scholar program as the funding vehicle for this tuition, families can save between $500 and $700 on their state income taxes.
To take advantage of this income tax break, simply open a Future Scholar 529 plan and fund the plan with the money you will be sending to the private school anyway. Then, request the plan send the money to the students account at the school of your choice. By using the 529 plan as a middle man in the transaction you will save yourself 5% to 7% on your annual tuition expenses by lowing your state income tax liability for the year you make the contribution.
It is also important to understand any sales charges associated with your 529 plan investments. In South Carolina you can open a 529 plan directly with the sponsor and avoid sales charges and loads. If you go through a broker your savings could be negated by the additional expenses. Another good reason to work with a fee-only financial advisor.
While there are limits to the amount you can contribute each year to a 529 plan, you should understand that contributions are considered gifts. Contributing more than $15,000 per parent per year can be complicated but there are strategies to contribute much more in a single year and stretch the tax benefits of doing so.
You should also understand how using this tax saving strategy will impact your savings goals for post high school education. College expenses will still need to be planned for and funded, so have a plan in place to address both education funding needs. Talk to your tax professional or financial advisor about not only maximizing the tax advantages of a 529 plan for college- but for private elementary and high school as well.