All About 529 Accounts - Adviser Investments

All About 529 Accounts

May 29 is (almost) here and we thought we’d take the opportunity to discuss some of the benefits of the other 5/29—529 education savings accounts.

529 plans are tax-advantaged investment accounts designed to help you save for tuition and expenses related to private K–12 and higher education. Anyone can open a 529 account for a designated beneficiary or 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 aren’t limited to selecting a school in the state that sponsors your 529.

Getting started: First, evaluate the investment options available to you, as they are not uniform from state to state. Second, check to see if you’d receive a tax deduction on your contributions if you elect to use your home state’s plan. (Several states allow you to deduct contributions regardless of which state’s plan you invest in—click here for more details.) Finally, consider the costs associated with each plan—like other investment choices, fees vary.

Tax benefits: The main appeal of 529 plans is their tax friendliness; think of them 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 is 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 nonqualified plan withdrawal.

Special considerations: 529s can work well as wealth-transfer and estate-planning vehicles. You can make a one-time contribution of up to $80,000 ($160,000 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 to those who can afford to do so is twofold: It moves a big chunk of money out of your estate in one fell swoop and it front-loads the 529 plan with a large sum that can immediately begin compounding upon itself as its investments grow.

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 plans are such a popular way to save for education expenses. If you are interested in learning more, click here to read our special report on 529s or listen to our podcast on saving and investing for education. As always, if you have any further questions, please contact your wealth management team. We are happy to help—after all, we are The Planner You Can Talk To.

Any topics you’d like us to address in a future FPF section? Please contact your team or write to us at We’d love to hear your suggestions.

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