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National 529 Education Savings Day: Investing in the Future

National 529 Education Savings Day: Investing in the Future

May 29, 2024

Happy National 529 Education Savings Day!  

Summer is approaching and that means the end of another school year. While many are excited for their summer plans to begin, some families are also getting ready to embark on a new chapter in their journey; sending their child off to college in a few months!

As the cost of education continues to rise, planning ahead for this next chapter is more important than ever. Saving in advance can greatly reduce the student debt your child might face after graduation, allowing them to start their adult life on a stronger financial footing. Every bit saved now can make a big difference in their future financial freedom.

Today, let’s chat a little about 529 plans – what they are, how they work, and why you might want to look into starting one if you haven’t already. There are two main types of 529 plans: college savings plans and prepaid tuition plans. Because prepaid tuition plans are not offered in every state, we’re going to focus on college savings plans for this blog.

Let’s start with what a 529 plan is…

In simple terms, it’s a tax-advantaged saving plan designed to encourage saving for future higher education costs, while helping you make the most of your hard-earned dollars. Contributions are made with after-tax money, so while you won’t get to deduct anything from your federal income taxes, any earnings from the plan can grow tax-free until they’re needed. 

While many states offer their own plans with additional state tax benefits, you have the freedom to choose from a variety of plans nationwide. Do your research and find a plan that suits your preferences and financial goals.

As for how they work…

The account owner (typically a parent) retains control over the account, including how the funds are invested and when withdrawals are made. Plans offer a variety of investment options, so the account owner can align the savings strategy to their individual risk tolerance and investment goals. As the beneficiary gets closer to college age, investment strategies can be adjusted to reduce risk if desired.

If you have multiple children, do you need to open separate accounts? The short answer is no. Each account can only have one beneficiary at a time though, so keep this in mind if they will be in need of the funds at the same time. As it is with most things, there are pros and cons to opening a single account versus separate accounts for each child. Be sure to consider maintenance fees, tax advantages, and contribution limits, to name just a few. 

In general, college savings plans can be used to pay for tuition, fees, room & board, supplies, and even certain technology expenses at eligible educational institutions for a named beneficiary. Plans are also flexible, so if the beneficiary decides not to go to college, or doesn’t need all the funds, the plan can transfer to another eligible family member without incurring any penalties. There are no time limits for use of 529 college savings assets, so a future grandchild, for example, could benefit from any remaining funds.

Some things to look at…

As we mentioned, some states offer their own plans with state tax benefits, but another plan may still better fit your needs, so be sure to look around. Before you decide on a plan, compare investment options, fees, and restrictions, as well as any state tax benefits.

Also, new as of January 1, 2024, as a result of the SECURE 2.0 Act, you may be able to transfer unused funds to a Roth IRA. Of course, there are rules and restrictions regarding this, and not all 529 plans allow this conversion, or treat it as a non-taxable event. It is, however, something else to consider when comparing the different 529 plans available.

When to get started…

Like most things in life, the earlier you start the better. Set up automatic contributions to your 529 plan if possible. Making even small, regular contributions to the plan can add up. You could also ask relatives or friends to contribute to the plan as part of the child's birthday present, instead of getting that additional toy. Thanks to the power of compounding, you can significantly increase your savings over time, making it easier to handle the ever-growing cost of higher education. Every little bit helps, and starting early gives you a crucial head start in building a substantial college fund for your child.

What if your child doesn’t end up going to college?

Don’t worry, you’ll have options!

As the account owner, you remain in control of the account. As mentioned earlier, there are no time limits for use of the plan assets and you can transfer the plan benefits to another family member, even yourself if you would like to take some adult learning courses.

You can also withdraw the funds. But be aware, when it’s not for a qualified purpose the earnings portion will be subject to taxes and possibly a penalty.

There’s also now the additional option to transfer the funds to a Roth IRA. As mentioned earlier, there are some rules you must abide by before you can do this, and there's also an annual and lifetime limit amount, so make sure you talk to your plan manager to understand all the eligibility requirements.

We hope this brief overview has helped to take some of the mystery out of 529 plans. As always, if you have any questions we can help answer, please reach out!

Disclosure: Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses, summary prospectuses and 529 Product Program Description, which can be obtained from a financial professional and should be read carefully before investing. Depending on your state of residence, there may be an in-state plan that offers tax and other benefits which may include financial aid, scholarship funds, and protection from creditors.. Before investing in any state's 529 plan, investors should consult a tax advisor. If withdrawals from 529 plans are used for purposes other than qualified education, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax.