Saving for College Through 529 Plans

As the cost of higher education continues to rise, parents and grandparents are increasingly seeking effective ways to save for their families’ college education.  One of the most widely used investment vehicles to achieve this goal is a 529 college savings plan because it offers unique advantages.  In this second part of our 529 mini-series, we will focus on beginning the journey of saving for college and the benefits of using a 529 plan.

How to get started with opening a 529 plan:

• Research and choose a plan.
  • 529 plans are administered by each state; you are not required to use the 529 plan in your home state.
  • Explore your state’s 529 plan, along with plans in other states, to evaluate features, fees, investment options, and potential state tax benefits.
  • Some states offer additional tax incentives for residents who use their own state’s plan.
• Decide the account registration.
  • 529 plans have one account owner (usually a parent or grandparent) and a beneficiary (the student). A 529 plan will typically require social security numbers, dates of birth, and contact information of both parties.
  • 529 plans do not allow joint ownership.
• Select investment options.
  • Most 529 plans offer a range of investment options, including age-based portfolios that automatically adjust the investment allocations as the beneficiary approaches college age, as well as individual funds that may be selected by the account owner.
  • Choose the investment strategy that best aligns with your goals and risk tolerance.
• Fund the account.
  • Once you establish a 529 plan the custodian will provide you with options for funding, including the ability to link a bank account. The account may be funded in a lump sum or with multiple payments, including automatic contributions. 
• Monitor and adjust as necessary.
  • An age-based investment strategy requires less maintenance than a portfolio of individual funds, but it is important to understand the allocation strategy and review account performance over time.
  • You can change your investment strategy, but there may be a limit to the number of changes you can make per year.

Benefits of using a 529 plan for college savings:

• Tax advantages
  • One of the most significant benefits of using a 529 plan is the wide range of tax advantages. While 529 contributions are not federally tax deductible, some states provide tax benefits for residents who invest in their own state’s plan, and earnings grow tax-free. 
  • Furthermore, plan withdrawals are tax free if used for qualified education expenses, such as tuition, room and board, textbooks, and some computer equipment.
• Flexible contribution limits
  • In 2023, individuals can contribute up to $17,000 (the annual gift tax exclusion) to a 529 plan without triggering a gift tax.
  • 529 plans can also be frontloaded with a lump sum, up to 5 years’ worth of contributions in a single year ($85,000 in 2023).
    • If grandparents are contributing to a 529 plan, this strategy can work as an estate planning tool.
  • Anyone can contribute to a student’s 529 plan, not just the account owner.
• Control for account owners
  • The 529 account owner retains control over how the funds are invested and distributed, even while the beneficiary is in school.
  • If circumstances change and the beneficiary decides not to pursue higher education, the account owner can change the beneficiary to another family member.
• No income restrictions
  • Unlike some other education savings accounts, 529 plans have no income restrictions.
  • Families of all income levels can take advantage of a 529 plan.
• Impact on financial aid
  • If the 529 is owned by a parent, it is reported as the parent’s asset on the Free Application for Federal Student Aid (FAFSA) form, which is more favorable than an account held in the student’s name.
  • If the 529 is owned by a grandparent, it is not reported as an asset on the FAFSA form.

In planning for a child’s higher education goals, it is critical to start early.  A 529 plan is a powerful tool for families to achieve these goals while benefiting from numerous tax advantages, flexibility, and control.  If you have questions about your education savings plan, the Glassy Mountain Advisors team is here to help.  Please contact Matt Altman (maltman@glassymountainadvisors.com) to discuss your plan or other financial planning topics. 

This blog contains general information that may not be suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.

A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. Every state offers at least one 529 plan. Before buying a 529 plan, you should inquire about the particular plan and its fees and expenses. You should also consider that certain states offer tax benefits and fee savings to in-state residents. Whether a state tax deduction and/or application fee savings are available depends on your state of residence. For tax advice, consult your tax professional.  Non-qualifying distribution earnings prior to 2024 are taxable and subject to a 10% tax penalty.  Beginning in 2024, unused 529 plan funds may be rolled into a Roth IRA assuming the following conditions are met:  1) must have owned the 529 plan for 15 years, 2) can only convert funds that have been in the 529 plan for at least 5 years, 3) rollover amount cannot exceed $35,000 and 4) rollovers must be made to a beneficiaries Roth IRA.

Asset Allocation does not guarantee a profit or protect against a loss in a declining market.  It is a method used to help manage investment risk.

Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Glassy Mountain Advisors does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.