In recent years, education costs at almost every level have continued to rise. Families are increasingly left wondering how to plan for these future costs. 529 college savings plans have become a more popular and versatile tool for families looking to save for education expenses. Named after Section 529 of the Internal Revenue Code, these plans allow families to save and invest money for future education costs, with the added benefit of favorable tax treatment.
HighPoint Advisors, LLC, has been helping clients in Syracuse, NY, as well as the many other markets we serve across the country, with college planning for many years. Here, we explain how 529 college savings plans work, and the benefits of these plans.
What Is a 529 College Savings Plan?
A 529 College Savings Plan is a tax-advantaged investment account designed specifically for educational expenses. These accounts are typically sponsored by states and managed by financial institutions. Contributions to 529 plans can be made by anyone, not just parents. For example, grandparents, relatives, and friends can all contribute, making these plans a flexible option for collective saving efforts such as holidays or birthday parties. Speaking of contributions, the aggregate limits are generally high and vary by the sponsoring state. Some states allow for up to around $500,000 to be contributed to a single plan. If the intended beneficiary of a 529 Plan account does not need to use the entire balance, these plans provide flexibility in changing beneficiaries within the family.
At HighPoint Advisors, LLC, we have been helping clients invest for future education costs for many years, and have witnessed the many changes to this area of planning along the way. Whether they are in Syracuse, NY, elsewhere in our home state, or in the many other states we serve around the country, we can help set their families on a tax-efficient path to managing future education expenses.
How 529 Plans Work
Contributions of after-tax dollars are made to an individual 529 Plan account for an individual beneficiary, and that money is invested in a range of investment options. The account grows tax-deferred based on the performance of these investments in the markets. When withdrawals are made down the road, the earnings are tax-free provided the withdrawals are for qualified education-related expenses.
Account owners have a variety of investment options in most state’s plans, and these options have improved over time. Typically, the options are a mix of mutual funds and exchange-traded funds similar to what you might see in a 401k retirement plan. Portfolios can be created using age-based funds or risk-based funds, or owners can choose individual funds. Age-based funds have grown in popularity, and function similarly to Target Date Retirement funds that automatically become more conservative as the beneficiary ages.
Are There Financial Advantages to 529 Plans?
One of the primary advantages of 529 plans is their tax-free growth potential, which means you won’t pay taxes on the earnings along the way. This tax-free compounding can significantly boost savings over time, especially when contributions are made early and consistently. And, if you use the funds for qualified education expenses, the earnings are completely tax-free!
On top of that, most states allow for tax deductions or credits on contributions made to in-state plans, making it more attractive for residents to invest in their home state’s plan. The benefits vary by state.
A key thing to understand is that 529 plans are typically owned by parents, for the benefit of a student. That’s important because it means these accounts have a relatively minimal impact on financial aid eligibility compared to other savings vehicles. They are reported as parental assets on the FAFSA, which typically results in a lower impact on financial aid calculations.
What Are Qualified Education Expenses?
A common misconception is that the money in a 529 Plan can only be used to pay for tuition. In fact, the types of expenses eligible for tax-free withdrawals include a broad range of things students typically need while furthering their education. Examples include:
- Tuition and Fees: Colleges, universities, and other accredited schools
- Room and Board: Generally, these are for students enrolled on at least a half-time basis
- Books and Supplies: Required books and other related school supplies
- Computers and Related Equipment: Hardware, software, subscriptions, licenses, etc.
The Evolution of 529 Plans
Since their inception, 529 Plans have undergone several noteworthy changes. Recent legislative updates have greatly expanded the scope of how these accounts can be used. While originally used as a funding vehicle for college education, a 2017 law change allowed for these accounts to pay for private K-12 tuition. In 2019, that was expanded to include various other levels of education, including apprenticeship programs.
Also in 2019, the SECURE ACT allowed for 529 Plan funds to be used to repay student loans (generally up to $10,000). One last noteworthy change takes effect in 2024, and that is the ability to roll over unused 529 Plan funds into a Roth IRA for the named beneficiary. The Roth IRA Rollover option is subject to certain conditions and has a $35,000 lifetime limit as of this writing.
Let’s Talk About Your College Savings Plan
529 Plans have become a crucial tool in planning for future education costs. They offer tax advantages, flexible usage options, and investment growth potential, making them a powerful resource for families. In today’s modern world, not every potential student will choose a traditional path to a college education, and recent changes to 529 Plans have made these accounts the ideal vehicle to accommodate a complex and changing education path.
Our advisors at HighPoint Advisors, LLC, have been working for many years with clients of all ages to plan for future education. When and where appropriate, we have used 529 Plans to address the uncertainties of planning for a range of future education opportunities.
Given how complicated it has become to save for higher education, consulting with a qualified advisor is more important than ever. Contact us today to tell us your family’s education goals, and we’ll talk about crafting a plan that’s right for you. We provide a wide range of financial services for clients in Syracuse, NY, and beyond.