Celebrate National 529 Day: The Benefits of 529 College Savings Plans for Your Family's Future

National 529 Day, celebrated on May 29th, is the perfect time to focus on one of the smartest ways to save for your child’s education: the 529 College Savings Plan. In this article, I’ll explain the basics of these plans, how they work, their tax advantages, and why they might be the best choice for your family’s educational savings.

What is a 529 College Savings Plan?

A 529 College Savings Plan is a tax-advantaged savings account designed to help families save for future education expenses. Named after Section 529 of the Internal Revenue Code, these plans are sponsored by states, state agencies, or educational institutions. They offer a flexible and powerful way to invest in your child's educational future.

How Does a 529 Plan Work?

1. Opening an Account: You can open a 529 plan through your state’s program or a financial institution. However, you are not limited to only your own state’s plan. If you live in a state with state tax benefits on contributions, it may be more favorable from a tax perspective to open a plan in your home state. If you live in a state with no state income tax, like Florida, you are free to choose any state’s plan. This provides you with greater freedom to select a plan that has minimal fees, optimal investments, and ease of administration.

2. Selecting and Changing a Beneficiary: You’ll need to choose a beneficiary, usually your child, when you open the account. The beneficiary is the person who will be using the funds for qualified educational purposes. 529 plans have quite a bit of flexibility in terms of who in the family qualifies to use the funds. You have the option to change the beneficiary to an eligible family member without any penalty or tax consequences so long as the original adult (commonly called the Participant) is the same individual. This flexibility can be a game-changer for families with multiple children or for passing unused funds down to the next generation. If one child receives a scholarship or decides not to attend college, you can redirect the funds to another family member's education.

3. Contributing to the Account: You can contribute to the account as frequently as you like, up to the plan’s contribution limits. Some states offer automatic contribution options to make saving even easier. In 2024, you can contribute up to $18,000 per individual, or $36,000 per couple per child without filing a gift tax return. Another great feature of these plans is the option to superfund the account. That means you could gift five years’ worth of gifts at one time: $90,000 or $180,000 for single or married couples respectively. Just remember to file IRS form 709 to track the gift as part of your lifetime gift tax exemption. This can be a great solution for a grandparent who is trying to gift money to pass on to the next generation and would be considered outside of their estate.

4. Investing the Funds: The money you contribute is invested in a portfolio of your choice. Most plans offer a range of investment options, from conservative to aggressive, depending on your risk tolerance and time horizon. Many of these plans offer age-based solutions which will be more growth-focused while they are younger and automatically convert to a more conservative portfolio as the child gets closer to college age. This can be a great set-it-and-forget-it solution for someone who doesn’t want to remember to manage and rebalance the portfolio over time.

5. Using the Funds: When your child is ready for college, you can withdraw the funds tax-free, as long as they are used for qualified education expenses such as tuition, fees, books, and room and board.

Tax Treatment of 529 Plans

One of the most compelling features of a 529 plan is its tax advantages:

• Tax-Free Growth: Earnings on your contributions grow tax-free, which can significantly increase the amount available for education expenses.

• Tax-Free Withdrawals: Withdrawals used for qualified education expenses are also tax-free, meaning you don’t pay federal taxes on the growth when you use it for education or an eligible rollover to a Roth IRA.

• State Tax Benefits: Many states offer additional tax benefits, such as deductions or credits for contributions to a 529 plan. For example, in New York, residents can deduct up to $5,000 ($10,000 for married couples) of their contributions from their state income taxes each year.

Benefits of 529 Plans

1. Flexibility: Funds in a 529 plan can be used for a variety of educational expenses at eligible institutions across the U.S. and even some abroad. This includes vocational schools, community colleges, and traditional four-year universities. It covers books and fees, room and board, meal plans on campus, computers and lab fees, and can be used for K-12 private tuition.

2. High Contribution Limits: Unlike some other savings vehicles, 529 plans typically have high contribution limits, often exceeding $300,000, depending on the state.

3. Control Over the Account: As the account owner, you retain control over the funds. You can change the beneficiary to another family member if the original beneficiary doesn’t need the funds.

4. Minimal Impact on Financial Aid: Money in a 529 plan is considered a parental asset, which generally has a smaller impact on financial aid eligibility compared to assets held directly by the student. For FAFSA purposes, a grandparent-owned 529 plan currently does not impact a student’s financial aid eligibility.

5. Easy to Set Up and Manage: Opening a 529 account is straightforward, and many plans offer online management tools and resources to help you stay on track.

6. New Roth IRA Rollover Option: Starting in 2024, Congress is allowing up to $35,000 in leftover savings from 529 plans to roll tax-free into a Roth IRA for the eligible beneficiary. This eliminates fears of overfunding the accounts or in the event the child doesn’t go to college and having funds trapped within the plan or taxed for unqualified distributions. With the new 529 rollover-to-Roth, a plan could be started at birth and transferred after the plan has been opened for 15 years to begin saving for the beneficiari’s retirement if funds were no longer needed for college expenses. The beneficiary would still need to show earned income in order to make the contribution to the Roth IRA. In 2024, the maximum Roth IRA contribution limit is $7,000 so it would take five years to maximize the full $35,000 rollover option.

Taking the Next Steps

In recognition of National 529 Day, now is the perfect time to start or review your college savings strategy. Here’s how you can get started:

1. Evaluate Your Options: Research the 529 plans offered by your state and compare them with plans from other states to find the one that best suits your needs.

2. Consult with a Financial Advisor: Schedule a meeting with a financial advisor to discuss your goals and get personalized advice on selecting and managing a 529 plan.

3. Set Up Automatic Contributions: Consider setting up automatic contributions to make saving easier and more consistent.

4. Stay Informed: Keep track of your plan’s performance and stay informed about any changes in tax laws or plan benefits that could affect your savings strategy.

By taking these steps, you can make a significant impact on your child’s future education and reduce the financial burden of college costs. A 529 College Savings Plan is a powerful tool that can help your family achieve its educational, multi-generational, estate, and retirement planning goals while enjoying the tax benefits.

Celebrate National 529 Day by investing in your child’s future today. For personalized advice and support, don’t hesitate to reach out. Let’s make your child’s educational dreams a reality!