529 College Savings Plans: What Financial Practitioners Need to Know

By Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, boneill@njaes.rutgers.edu

Saving for a child’s post-secondary education is an important financial goal for many military families. There are four basic ways to pay for college or post-secondary vocational/technical school costs:

  1. “Pay-as-you-go” from parents’ and/or a student’s current income
  2. Borrow money (student loans)
  3. Acquire money (scholarships and grants and gifts; e.g., from grandparents)
  4. Save money over time and earmark it for education expenses
College graduates throwing their caps
Photo by Pixabay.com, CC0

A popular college savings vehicle is a 529 plan. Named for a section of the U.S. tax code, 529 plans are administered by individual states and plan features (e.g., investment selection, contribution limits, and fees) vary from state to state. Below are ten things that financial practitioners need to know about 529 plans:

  1. Any Savings Helps- Even if parents cannot save anywhere near enough to fully fund a 4-year degree, any savings is better than none. The greater the amount of savings, the less students or parents need to borrow.
  2. Early Savings is Powerful- America Saves noted “parents who start saving the year their child is born and make regular contributions can save upwards of a third of their savings goal in interest earnings alone.”
  3. Automatic Savings is Also Powerful- Parents can arrange automatic transfers from their checking account to make regular monthly 529 plan deposits. Doing this takes advantage of the dollar-cost averaging strategy.
  4. There are Tax Benefits- Money saved in 529 accounts that is used to pay for tuition and other qualified education-related expenses (e.g., textbooks, computers, lab fees) grows tax-deferred and can be withdrawn free of federal income tax. In addition, many states offer tax deductions or credits on state income taxes.
  5. There is No Residency Requirement-Account holders (generally a parent) can participate in any state 529 plan. However, state tax benefits typically apply only to people who invest in their home state plan. State plan contribution limits range from a minimum of $25 or $50 a month to a total of $300,000 to $400,000.
  6. Beneficiaries Can Be Changed– Plan beneficiaries (typically a child) can be changed to another person, such as a sibling, if needed. For example, this may occur if a child decides not to go to college.
  7. Account Owners Maintain Control- Unlike Uniform Gifts to Minors Accounts, 529 plan account owners maintain control of 529 accounts when beneficiaries reach legal age.
  8. Non-Education Withdrawals Are Penalized- If no one in a family can use 529 plan savings for education, the money can still be withdrawn but a 10% federal income tax penalty will apply.
  9. Investment Performance Varies– 529 plan deposits are typically placed in mutual funds and performance will vary with market conditions and the amount of fees that are charged on 529 plan investments.
  10. 529 Plans Are Not Just for College- As part of the Tax Cuts and Jobs Act, through 2025, parents can use 529 plan savings, not just for post-secondary education, but for private elementary and high school tuition.

For additional information about 529 college savings plans, review the publication 529 Plans and Other Ways to Save for College from Affordable Colleges Online and the America Saves blog post How to Save for Your Child’s Education with a 529 Plan.

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