Many families dream of sending their children to college, but today sending a child to college can become one of the largest expenses a family will ever face outside of purchasing a home. To make this dream a reality, it makes good sense to plan ahead and start to save for your child’s education at an early age. A 529 plan is a popular and easy way to set money aside for this purpose, save for future higher education expenses and help families achieve their college dreams.
What is a 529 Plan?
A 529 plan is a tax-advantaged savings program designed to function like a traditional investment account, where deposits are invested in a portfolio of stocks, bonds, or other assets. The money remains invested until you use the funds in in the account to pay for expenses related to enrollment in college, vocational studies and even apprenticeships. Funds in the account can grow over time, depending upon how they are invested, and the funds may be used to pay for a variety of qualified higher education expenses, including tuition, certain room and board fees, supplies, books, and computers —most expenses related to your course of study.
Five important reasons why families should consider saving in a 529 Plan
- Tax Benefits: Contributions to a 529 plan are made with after-tax dollars, and any earnings are tax-deferred. When you withdraw funds to pay for qualified education expenses, these withdrawals are tax-free. In many states, contributions to a 529 plan may even be deductible on state tax returns.
- Affordability: 529 plans have low minimum contribution requirements, making it possible for all families to start saving for college in affordable increments within their own family budgets. Additionally, many plans offer automatic contribution options allowing the set up of regular bank or payroll deposits, making it easy to make deposits into the account systematically.
- Flexibility: 529 plans aren’t just for college. Funds can be used for qualifying apprenticeship programs, trade schools, and graduate programs. Recent changes in Federal legislation allow 529 funds to be used to repay up to a lifetime limit of $10,000 in student debt and up to $10,000 in tuition for K-12 private schools. Additionally, account owners may change the beneficiary of a 529 plan if a student does not attend college or if the funds are not used. Please check with your own state program on these latest additions to the qualified higher education expenses. Some states do not fully conform with the federal laws regarding distributions for K-12 tuition, apprenticeship programs, and student loan repayment. Distributions used to pay for tuition expenses at a public, private, or religious elementary, middle, or high school, registered apprenticeship programs, and student loans may be considered non-qualified, and the earnings portion of the withdrawal is subject to state income tax. In addition, non-conforming states offering a state income tax deduction for 529 plan contributions may impose a recapture if funds are used for K-12 tuition, apprenticeship programs, and student loan repayment. You should talk to a qualified professional about how tax provisions affect your circumstances. Apprenticeship programs must be registered and certified with the Secretary of Labor under the National Apprenticeship Act.
- Investment Management: Many 529 plans come with low-cost, professionally managed investment options like school enrollment year and age-based portfolios, so you don’t have to be an investing expert to develop a 529 plan savings strategy. You can choose a portfolio based on when the student will likely use the funds.
- Crowd-funding: Anyone can contribute to a 529 plan — some education savings programs, like Coverdell Educational Savings Accounts, set a maximum income limit to qualify, meaning not all families can take advantage of the accounts. 529 plans do not set such restrictions. You can qualify for federal tax breaks on 529 earnings, regardless of income. And anyone can contribute to a child’s account, regardless of their relationship. Many 529 plans feature gifting capabilities, allowing a family to share a secure link to allow family and friends to make contributions for a child.
Overall, a 529 plan can be a smart investment tool for families saving for higher education. With the features above, these plans can offer a convenient and effective way to save. Families may utilize 529 plans as part of their financial strategy to help achieve college savings goals and launch into adulthood with less student debt.
When considering a 529 plan, it is important to select the right plan for your family’s needs. Factors to consider when selecting a 529 plan include well-managed investment options, low fees, and, if relevant, your own state’s tax benefits. In taking this first step towards saving with a 529 plan, families will increase the probability of seeing the dream of their children graduating from college becoming a reality.
About the Authors
Adal Padilla joined TIAA Education Savings in 2018 bringing with him over ten years of financial services experience. As a Sr. Consultant, Adal is focused on helping families achieve success in saving for their loved one’s higher education by providing them the tools and guidance to get them started. Adal received his Bachelor of Science degree in Business Administration at La Universidad de Guadalajara in Mexico. He lives in Los Angeles, enjoys spending time with his family and friends, but traveling is his favorite thing to do. Adal volunteers as the National Business Manager with the UNITE Business Resource Group at TIAA helping with different projects supporting the Latino community.
Vivian Tsai leads TIAA Education Savings’ Relationship Management and Consulting teams. Education Savings provides 529 plan program management services for the States of California, Colorado, Georgia, Michigan, Minnesota, Oklahoma, and Wisconsin. Vivian is Chair of the Board of the College Savings Foundation, sits on the Governance Committee for the College Savings Plan Network, and has been a Certified Investment Management Analyst and a Certified Private Wealth Advisor since 2007. She received her Bachelor of Science degree in Economics from the University of Pennsylvania and is a proud mom of two recent college graduates.
529 College Savings Plans are offered and administered by the issuing state. Please refer to the Plan Description prior to investing for investment objectives, risks, charges and expenses. Read it carefully. Check with your home state to learn if it offers tax or other benefits such as financial aid, scholarship funds, or protection from creditors for investing in its own 529 plan. Investments are neither insured nor guaranteed and there is the risk of investment loss. Consult your legal or tax professional for tax advice. If funds aren’t used for qualified education expenses, a 10% penalty tax on earnings (as well as federal and state income taxes) may apply.
TIAA-CREF Tuition Financing, Inc. (TFI) is the Plan Manager for several state 529 plans, and TIAA-CREF Individual & Institutional Services, LLC, Member FINRA, is the distributor and underwriter for those plans.