529 Accounts & Education Planning - Adviser Investments

529 Accounts & Education Planning

May 29, 2020

Since it’s May 29, we thought we’d take the opportunity to discuss some of the benefits of 529 accounts (5/29, get it?). While colleges and universities ponder how, when and whether campuses will reopen in the fall, the one thing you can be sure of is that tuition discounts may be slow in coming, as institutes of learning are still trying to balance their costs with what residential students are willing to pay for an online learning experience if campuses remain closed this fall.

Here’s a quick overview on how you can better manage one of the smartest investments you can ever make:

  • The Basics: 529 plans are tax-advantaged accounts designed specifically for investors to save for tuition and expenses related to private K-12 and higher education. Anyone can open a 529 account for a designated beneficiary, and anyone is free to contribute to the plan once it’s open. Plans are state-sponsored, generally in partnership with a mutual fund company or institute of higher learning. However, you generally aren’t limited to selecting a school in the state your 529 is sponsored by.
  • Choosing a Plan: You have several key considerations in selecting a plan. First, evaluate the investment options available to you, as they are not uniform state-to-state. Second, you may be able to get a deduction on your contributions if you elect to use your home state’s plan, so be sure to explore that option if it’s available to you. (Read our exclusive special report for more details.) Plus, like other investment choices, fees vary.
  • Tax Benefits: Think of 529s like a Roth IRA, only for education savings rather than retirement. Contributions to the account are made with after-tax dollars, and growth of investments therein are tax-free. Plus, any withdrawals you make to pay for qualified education expenses are also untaxed. Withdrawals used to pay for expenses that aren’t qualified are subject to a stiff penalty, however—you will need to pay ordinary income tax plus a 10% penalty on any non-qualified plan withdrawal.
  • Special Considerations: 529s also work well as wealth-transfer and estate-planning vehicles. You can make a one-time contribution of up to $75,000 ($150,000 if married, filing jointly) for as many beneficiaries as you like and choose to treat the deposits as if they were made over a five-year period for gift-tax purposes. The benefit is two-fold: Move a big chunk of money out of your estate in one fell swoop and front-load the 529 plan with a large sum that can immediately begin compounding upon itself. And if a beneficiary decides they don’t want to go to college, the account owner can change the beneficiary to another qualified family member, penalty-free.

It’s easy to see why 529 accounts are such a popular method to save and invest for education expenses. If you are interested in learning more, click here to read our special report or listen to our podcast on 529s. As always, if you have any further questions, please let us know. We are here for you and your future scholar.


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