I had lunch with a financial advisor friend the other day, and she told me that May 29th is National 529 Day. Who knew that was a thing?
She shared some insights about 529 accounts that I honestly didn’t know, so I wanted to pass them along to you.
As you know, at Advocate Money Management, my goal is always to help you make the best financial decisions for your family, and 529 plans are definitely something worth considering if you’re thinking about how to pay for college for yourself or your children.
The cost of higher education is no joke. According to Morgan Stanley, it’s been rising at about twice the rate of general inflation, with a private four-year college averaging around $60,420 annually as of Fall 2023. Yikes!
Thankfully, there are tools like 529 plans that have really changed the game for families looking to invest for college and other qualified education expenses. They offer a lot of flexibility and control, along with benefits that other savings programs just don’t.
Make your budget go further! Here are 10 things you should know about 529 plans that make them a great option for saving for college:
1. 529 Plans Are Not Just for Kids!
This was my first “aha!” moment.
While most of us think of 529 plans for our kids’ college, they’re actually ideal for anyone with education funding needs.
Whether you’re a retiree looking into lifelong learning, or a professional heading back to school to boost your career, a 529 plan could definitely fit into your investment portfolio.
2. 529 Plans Offer Tax-Deferred Growth and Tax-Free Withdrawals for Qualified Expenses
This is a huge one! Money saved in a 529 plan generally grows free of federal and state income taxes. Even better, when you use the funds for qualified education expenses, your withdrawals are also federal income tax-free.
Qualified expenses include things like tuition, fees, room and board, books, and supplies at almost any accredited post-secondary school.
Plus, thanks to the SECURE 2.0 Act, starting in 2024, you might even be able to roll over leftover 529 assets to a Roth IRA for the designated beneficiary, though there are specific requirements and limitations for that.
3. 529 Plans Have High Maximum Contribution Limits
You can really save a lot with a 529 plan. Most plans allow contributions in excess of $500,000 per account per beneficiary.
This means you can build up a significant amount to cover a wide range of education expenses.
4. You, the Account Owner, Have Control
Unlike some other education funding vehicles where assets have to be turned over to the beneficiary at a certain age, with a 529 plan, you maintain control. You decide if and how the money is used.
This means if your initial beneficiary doesn’t use the funds for education, you have other options, such as changing to another eligible beneficiary or even using the plan for your own education.
5. 529 Plans Have No Age or Income Restrictions
Another fantastic benefit! Unlike some other education savings vehicles, 529 plans generally don’t have age or income restrictions.
This means almost anyone—parents, grandparents, aunts, uncles, or even friends—can own or contribute to a 529 plan. You can even change the beneficiary without penalty.
6. Potential Federal Estate Tax Benefits
Contributing to a 529 plan can actually help reduce your federal estate tax liability by removing taxable assets from your estate. Your contribution is considered a completed gift to the beneficiary for gift-tax purposes and qualifies for the annual gift-tax exclusion.
You can even contribute larger amounts (within limits) and elect to treat it as if it were made over a five-calendar-year period for gift-tax purposes.
And the best part? Even though the asset leaves your estate, you still keep control as the owner of the 529 plan.
7. 529 Plans Are Not Just for In-State Colleges and Universities
This is a common misconception!
You can use a 529 plan for education expenses starting from kindergarten all the way through graduate school. Whether it’s an in-state, out-of-state, or even an international institution, as long as it’s an accredited program, you can use your 529 funds.
Plus, some of the funds can also be used for K-12 tuition, qualified student loan repayments, and certain costs for qualifying apprenticeship programs.
8. 529 Plans May Have Potential State Tax Benefits
Many states offer additional tax benefits for contributions to 529 plans, such as income tax deductions or credits.
Some states might limit these benefits to contributions made to their own state’s plan, so it’s always good to check with your financial advisor or tax advisor on your specific state’s laws.
9. 529 Plans Are Professionally Managed with Investment Options
You don’t have to be an investment expert to own a 529.
These plans are professionally managed, giving you access to experienced money managers.
While many offer age-based portfolios that become more conservative as college approaches, there are many other investment options available, offering you plenty of choice.
10. Minimal Impact on Financial Aid Calculations
This is great news for families concerned about financial aid. A 529 account owned by a parent for a dependent student is reported on the FAFSA (federal financial aid application) as a parental asset and the amount that can be counted in determining the student’s Student Aid Index (SAI) is limited.
Even better, 529 accounts owned by grandparents and others have no assessment under the new FAFSA guidance.
Contact A Professional To Learn If A 529 Plan Is Right For You
Saving for college can feel overwhelming, but 529 plans really do offer a fantastic way to tackle those rising costs while providing some great benefits.
If you’re looking to put a loved one on the path to success, or even pursue your own education goals, it’s definitely worth exploring.
As always, I recommend chatting with a qualified financial advisor to see how a 529 plan fits into your unique financial picture.
To learn more, you can always check out resources from reputable financial institutions like Morgan Stanley or your own financial investment advisor.
Have you set up a 529 plan for yourself or someone else? Share your experience with our readers in the comments!
Check Out These Related Resources
- How To Create A Balanced Budget: Childhood Lessons
- Why Don’t I Have Enough Money?: The Importance Of Timing In A Budget
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