May 29 is National 529 Day. The intent of National 529 Day is to raise awareness and encourage individuals and families to consider investing in a 529 plan to focus on the success of future generations. College is expensive, and starting to save early with a 529 plan or similar college savings vehicle can help you get a jump on accumulating funds for college for children or grandchildren.
What is a 529 Plan?
A 529 is a college savings plan offered by various states. Contributions are made on an after-tax basis, though some states may offer a tax deduction for state residents who contribute to the plan. Contributions to the plan can be invested and the money inside of the plan grows tax-free.
Withdrawals are tax-free if they are used for qualified higher educational expenses, or expenses for K-12 education within the rules. Beyond basic 529 plans, some states offer prepaid tuition plans that allow parents to pre-pay the tuition at designated institutions.
Jeff Spencer, Vice President of Investments of the Wedbush Securities Traverse City office says, “There are a lot of myths out there about 529 plans – mainly that they lack flexibility and that the hassle isn’t worth the benefit. I could not disagree more. Not only have we used 529s to pay for traditional higher education, but we frequently use them to pay for community colleges and trade schools.”
Spencer adds, “In fact, we’ve had students pay for tools for mechanical school using 529 funds. In addition, we see a tremendous value not just in the tax deferral, but also in the ability to use 529s as an estate planning tool, as grandparents can give intra-family gifts to grandchildren – reducing the size of their estate and keeping wealth in the family for a valuable need. Even better, funds can be moved tax-free between immediate family members, or even be passed on to their children if gone unused.”
Benefits of a 529 Plan
A 529 offers a number of benefits for parents trying to save for their children’s education.
Spencer says, “For families that have a goal for saving for college for their children or grandchildren, we feel 529s provide an excellent, tax efficient vehicle to invest funds for educational needs. While all 529 accounts grow tax-deferred and can be withdrawn tax-free for higher educational needs (i.e. tuition, room and board, books, even a laptop for school purposes), many states also offer a state tax deduction for annual contributions as well (up to $10,000 annual contribution deduction here in our state of Michigan, for example).”
He adds, “Even further, many of the perceived limitations of 529 accounts have been addressed over the past few years through updated rules that allow for funds to be used for K-12 private school tuition, as well as very recent changes that will allow for up to $35,000 of unused 529 funds to be rolled over tax-free into a Roth IRA for a student that ends up not needing the balance for an educational need.”
In addition, recent changes in the rules now allow a portion of any money left over in a 529 account to be used to pay off a portion of the beneficiary’s student loan debt, if applicable. A portion can also be used to pay down the student loan debt of the beneficiary’s siblings as well.
How to celebrate 529 Day
One great way to celebrate is to open a 529 account for your child, grandchild or even for yourself if some sort of higher education is in your future. Many 529 providers are offering promotions this month. Definitely speak with your financial advisor to discuss the best option, including the two main types of college savings plan options.
Consider adding to an existing 529 either as a one-time payment or start making regular automatic payments. Whether for your own children or another friend or relative, a contribution to a 529 is a great way to support their educational ambitions.
Other college savings options
Beyond a 529 plan, there are a number of other ways to save money for college.
A custodial account is an account opened and administered by an adult for the benefit of a minor. The rules for custodial accounts vary a bit by state, but one thing to remember is that these accounts are irrevocable and control of the account reverts to the beneficiary once they reach the age of majority in their state. Once they have control of the account, they are not obligated to use the money for educational expenses.
A Roth IRA can also be used as a college savings account. If the child beneficiary works and has earned income, the account can be opened in their name. Whether your Roth IRA or theirs, withdrawals of money contributed can always be withdrawn tax or penalty free. If you are under age 59 ½, withdrawals of earnings in the account can be taken penalty free, but they could be taxed. If you are over age 59 ½ and have met the five-year rule, all withdrawals are tax and penalty free.
You can also use a savings account. Money in the account is liquid, safe and readily available. Perhaps the downside is the returns may lag an investment account such as a 529 or a taxable brokerage account.
Make sure to reach out to your Wedbush financial advisor to discuss your college savings goals for your children, grandchildren or others. They can help you establish the best type of account and formulate a plan to achieve your goals in this area.
Disclosure
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.