FINANCIAL PLANNING TIDBITS: HAPPY 529 DAY!
SUMMARY
Paying for college is one of American families’ top financial goals. In recognition of 529 Day on Sunday (May 29), we’ll present five advantages a 529 plan can offer if you intend to help your student through college
COLLEGE FINANCIAL PLANNING
With the average four-year in-state public college costing $27,330 in 2021-2022 (source: CollegeData.com), strategizing a plan to pay for college is crucial for success. Learning all the options available, however, could almost be an entire education in itself! From federal and private student loans to scholarships and grants, and from work-study programs and part-time study to building up savings with family contributions, financing college runs the full gamut of possibilities. In honor of 529 Day (May 29), we’ll touch on a very well-known strategy: the 529 plan.
FIVE BENEFITS OF A 529
A 529 plan is a type of investment vehicle into which you can contribute funds intended to pay for college. There are two types of 529 plans: a prepaid tuition plan and a savings plan, the latter of which we will be discussing here. A menu of investment options exists within the 529 savings plan, often broken into categories that take into account how many more years your student has left before heading to those storied halls of ivy. Here are five potential benefits a 529 may offer you if you intend to help fund your student’s college education.
Tax-free Distributions
People don’t always agree on everything, but we probably all agree that we would pay fewer taxes if we could. As long as withdrawals from the 529 account are used for qualified expenses (a sizable list at this point), they are free of taxes and penalties. Furthermore, any investment gains inside the account are also tax free.
2. Anyone can contribute
Does someone in your family want to help pay for your child’s education? Maybe you’re the one who wants to help a grandchild or a niece or nephew. Perhaps you have a friend who wants any monetary gifts to his or her children added to an already existing college fund. When it comes to funding a 529 account, it can accept contributions from anyone—family, friends, archenemies. Each person interested in funding the 529 can contribute up to $16,000 per year. Another option is for a contributor to “superfund” a 529 with five years’ worth of contributions in a single year (they can contribute again to the 529 account five years after superfunding). A 529 account has only one account owner, so be sure to coordinate with interested contributors. Also keep in mind that if the student owns the account, any money contributed to it will be counted as student income on the following year’s FAFSA if the student is of filing age, which can reduce the impact of a gift.
3. Beneficiaries can be changed
One concern that some parents have is overfunding a 529, especially if their child ends up at a less-expensive-than-expected college or chooses not to go to college at all. After all, nonqualified withdrawals are taxable and subject to a 10% penalty. The happy news is that you can change the beneficiary on your 529 plan to a qualified family member. This includes the beneficiary’s spouse, child (natural, adopted, or foster), child-in-law, sibling or step-sibling, brother- or sister-in-law, parent-in-law, parent, grandparent, stepparent, aunt or uncle or their spouse, niece or nephew or their spouse, and first cousin or their spouse. You can even make yourself the beneficiary.
4. Accounts can be opened anytime
Many people will open a 529 account when their child or grandchild is born, but a 529 can be opened at any point in a child’s life. Furthermore, because beneficiaries can be changed at will, you can open and fund a 529 account even before your intended beneficiary has been born.
5. The account remains in your control
Your student will be grateful for any kind of contribution no matter the form it takes. But with investment accounts in the student’s name—as with cash gifts—there is no tax benefit for using the funds for college, the funds can impact their college assistance qualifications on the FAFSA, and, importantly, the student will have full control of those assets. That means that if he or she would rather take the money out all at once or use it on something other than college, you have no authority to stop them. With a 529 account, however, you as the account owner get to take withdrawals at your discretion, not the beneficiary’s (unless you are the beneficiary!). Furthermore, if the account remains in a parent’s control, it won’t have as much of an impact on the expected family contribution as would a 529 or account within the student’s control.
There are a variety of nuances to take into account when it comes to 529 plans, and every situation is a little bit different. For many families, however, 529 accounts can be an appropriate tax-advantaged college funding option that widens the scope and timeframe of participation and provides the account owner continuous control over the assets and the beneficiary designation.
Best,
Natalie Brown, CFP®
Director of Client Services
Day Hagan Private Wealth
—Written 05.26.20212
Please note: In honor of Memorial Day on Monday, May 30, the Day Hagan Private Wealth office will be closed.
Print PDF Copy of the Article: Day Hagan Private Wealth Financial Planning Tidbits: Happy 529 Day! (pdf)
Disclosure: The data and analysis contained herein are provided “as is” and without warranty of any kind, either express or implied. Day Hagan Private Wealth (DHPW), any of its affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Private Wealth literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing.
Investment advisory services offered through Donald L. Hagan, LLC, a SEC registered investment advisory firm. Accounts held at Raymond James and Associates, Inc. (member FINRA, SIPC) and Charles Schwab & Co., Inc. (member FINRA, SIPC). Day Hagan Asset Management and Day Hagan Private Wealth are both dbas of Donald L. Hagan, LLC.