The 411 on 529s
It’s back-to-school time and let’s face it — education can be expensive.
The College Board reports that the average cost of in-state tuition, fees, room and board at a public four-year college in the U.S. was $20,770 last year. And that’s just a starting point — out-of-state tuition, private universities or graduate school can greatly increase that bill.
Yet relatively few people are aware of 529 savings plans, which can help cover costs. A recent survey by Edward Jones found that 71 percent of Americans don’t even know what they are.
A 529 is a tax-advantaged investment plan that was originally designed to save for higher education expenses. Recent changes in the tax law have increased their flexibility, and they now may be used for private-school tuition from kindergarten through high school, or transferred to other accounts to pay expenses for disabled youths.
HOW THEY WORK
While anyone can set up a 529 plan, typically they’re opened by parents or grandparents with a child as the beneficiary.
Contributions to the plan grow free from federal income tax, and withdrawals are tax-free when used for qualified expenses. It costs very little to get started and often can be done online.
“There is no better place to save for college than a 529 college savings plan,” said Ric Edelman, founder of Edelman financial services in Fairfax, Virginia.
The plans are run at the state level. While you don’t need to use your state’s plan, there are sometimes state-level tax incentives for doing so.
HOW TO USE THEM
Money in these accounts can be used at virtually any accredited college in the country and may be used to pay for tuition, books, supplies or other expenses. They can also be used to pay for technical schools and other professional programs.
The recent federal tax law overhaul expanded their use beyond higher education. Users can now withdraw up to $10,000 per year and per beneficiary to pay tuition expenses from kindergarten through 12th grade.
It seems like a great option for families paying for private school. But not all states allow use of these accounts for K-12 expenses, so withdrawals might be exempt from federal tax but subject to state tax. Financial experts also recommend you think twice before doing so, because the primary benefit of a 529 plan is that the money grows on a tax-deferred basis.
That means the money needs time to grow, Edelman said. Given the exorbitant cost of higher education, most families will “need to start putting money in when the baby is born and not touch it until the kid is a senior in college.”
Another new change for 2018 is that money in a 529 account can be rolled over penalty-free into an ABLE account. ABLE savings accounts are relatively new and look very similar to a 529, but the assets are used to help pay expenses for young people with disabilities.
HOW TO MAKE THE MOST OF THEM
You don’t have to be an expert to get started. The plans are professionally managed and sign up and investment choices are easy to manage, said Jim DiUlio, chair of the College Savings Plan Network.
Starting early is best, but it’s never too late to start, DiUlio said.
“If you have cash in hand in savings, those are dollars you don’t have to borrow and pay for at the other end,” DiUlio said.
The savings can be transferred to another family member or you can use it yourself. But if you don’t spend it on education, you will pay a penalty and taxes.
Laurie Beth Baird, a wealth strategist for PNC Wealth Management, said that families worried about setting too much aside should aim to save 50 to 80 percent of their costs.
Contribution limits are set at a state level but experts say it’s not really an issue as the limits are rarely reached. And there is no limit on how many accounts may be set up per child, meaning anyone can help save.