5 Things You Didn’t Know About 529 Savings Plans

Published: July 28, 2024

Unlock the Full Potential of Your 529 Savings Plan: Discover Five Hidden Benefits to Maximize Your Child's Education Savings

Regardless of your child’s age, there's no reason to wait to start saving—their journey to higher education comes faster than you realize. They grow up fast, so start planning now.

What Is a 529 Plan?

Before we jump into 5 surprising benefits, let's take a moment to learn about 529 plans in general. Understanding the basics will help you see how these lesser-known benefits can further maximize your education savings strategy.

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. These plans are named after Section 529 of the Internal Revenue Code and are sponsored by states, state agencies, or educational institutions. The primary 529 savings plan advantages include tax-free growth and tax-free withdrawals when the funds are used for qualified education expenses.

529 plans come in two forms:

• Education Savings Plans: These allow families to invest money for future college expenses, such as tuition, room and board, books, and other related costs.
• Prepaid Tuition Plans: These allow families to pre-purchase future tuition credits at today's rates for participating colleges and universities.

With their flexibility and favorable tax treatment, 529 savings plans are a great tool for parents and guardians looking to save for a child’s education while benefiting from significant tax advantages.

5 Things You Didn’t Know About 529 Plans

When it comes to saving for your child's education, 529 plans are a popular choice due to their tax benefits and flexibility. However, there are several lesser-known aspects of 529 plans that can enhance your saving strategy. Here are five things you might not know about the 529 plan advantages:

1. You aren’t limited to the 529 provided in your home state.
   There are numerous plans available nationwide. You can compare them based on factors such as maximum contribution limits, fees, and available tax benefits. Identifying your priorities will help you select a plan that best meets those criteria, ensuring you leverage the advantages of a 529 savings plan that suits your family’s needs.
2. You can change beneficiaries or shift funds pretty easily.
   One of the best advantages of 529 plans is flexibility. 529 plans are more flexible than you might think when it comes to beneficiaries. You can change the beneficiary to another family member without incurring taxes or penalties. This feature is particularly useful if one child decides not to attend college, allowing you to use the funds for another child's education​​. Additionally, you can roll over funds from one 529 plan to another beneficiary’s 529 plan once every 12 months without penalties​​.
3. Qualified education expenses are broader than you think.
   Funds from 529 savings plans can be used for a wide range of educational expenses beyond just tuition. Qualified expenses include room and board, textbooks, computers, and even internet access required for schooling. This flexibility ensures that more of your education costs can be covered using the tax-advantaged savings in your 529 plan​​.
4. The impact on financial aid is minimal.
   Parents often worry about how a 529 plan will affect their child's eligibility for financial aid. Fortunately, one advantage is its relatively minor impact. While 529 savings plans are considered parental assets, only up to 5.64% of the value is counted toward the expected family contribution (EFC) on the FAFSA. This is far lower than student-owned assets, which can be assessed up to 20%.
5. You have flexibility with unused funds.
   If your child doesn't use all the funds in their 529 plan, you have several options. As mentioned, you can change the beneficiary to another family member or use the funds for graduate school. Most notably, beginning in 2024, you can also roll over unused 529 plan funds to a Roth IRA for the same beneficiary. This rollover allows you to convert up to $35,000 of 529 plan funds to a Roth IRA over the beneficiary’s lifetime, providing a significant opportunity for tax-advantaged retirement savings​​.

Understanding these lesser-known aspects of 529 plans can help you make the most of your savings strategy for educational expenses. From state tax benefits and flexible use of funds to minimal impact on financial aid, 529 plans offer a variety of features that can be tailored to your family's needs.

How to Choose the Right 529 Plan

With many 529 plans available across the country, it’s important to choose the one that offers the best advantages for your family’s needs. Here are some factors to consider when selecting the right 529 plan:

• State Tax Benefits: Some states offer tax deductions or credits for contributing to their state’s 529 savings plan. However, you don’t have to use your home state’s plan to open a 529 account, so compare what different states offer in terms of tax benefits.
• Fees and Costs: Look for plans with low administrative fees and other expenses. High fees can reduce your overall savings over time. Always review the total cost of the plan, including investment management fees and any program-specific charges.
• Investment Options: Some 529 savings plans offer a variety of investment choices, such as age-based portfolios or fixed asset allocations. Consider the risk level you are comfortable with, the age of your child, and the plan’s performance history when selecting investments.
• Contribution Limits: Review the maximum contribution limits for each 529 plan. Some plans allow larger contributions, which can be beneficial if you're looking to save aggressively.
• Plan Flexibility: Look for plans that offer flexibility, such as easy fund transfers or changing beneficiaries. This ensures you can adapt the plan to your family’s evolving educational needs.

By carefully considering these factors, you can ensure you’re selecting a 529 savings plan that aligns with your financial goals.

Partner with Hall Financial Advisors for Expert Guidance

At Hall Financial Advisors, we understand that navigating financial decisions, like choosing the right 529 savings plan, can be complex. Our team of experienced wealth management advisors is here to help you create a financial strategy that aligns with your life and legacy goals.

Whether you're looking to maximize education savings, plan for retirement, or grow your wealth, we’ll work with you every step of the way. Take a proactive approach to your financial future today. Contact Hall Financial Advisors to learn how we can help you build a comprehensive plan tailored to your unique needs.

 

Sources:
U.S. Securities and Exchange Commission. (2023, August 31). Updated Investor Bulletin: 10 Questions to Consider Before Opening a 529 Account. SEC. Retrieved June 25, 2024, from https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_529accountquestions
Compare 529 Plans By State. (2023, October 17). Forbes Advisor. Retrieved June 25, 2024, from https://www.forbes.com/advisor/student-loans/compare-529-plans-by-state/

Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Past performance is no guarantee of future results. Material provided by Oechsli, an independent third-party. Raymond James is not affiliated with Oechsli Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 college savings plans before investing. More information about 529 college savings plans is available in the issuer's official statement. The official statement is available through your financial advisor and should be read carefully before investing. Before investing, it is important to consider whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program.

As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Tax implications can vary significantly from state to state.
Withdrawals from 529 accounts that are not used for qualified education expenses are subject to taxes and penalties.

As a result of the SECURE ACT 2.0, unused funds in a 529 account can be rolled over to a ROTH IRA for the beneficiary. The 529 account must have been open for a minimum of 15 years and Contributions made to the 529 plan in the last five years, including the associated earnings, are ineligible for a tax-free transfer. Rollovers to a ROTH IRA are subject to the standard annual ROTH IRA contribution limits.  #547393

 

 

 

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