Back-to-School, Back-to-Planning: 529s

By Ashley Bleckner, MA, CFP®

It’s that time of the year. The days get shorter, the heat starts to let up, and we are thinking about school again. It can be a busy and stressful time for families – especially if a member of your household is approaching college age. But even if your student is in elementary school or younger, the best time to think about the future of their education is now.

From a financial perspective, it can be unnerving to see the high cost of college education and think about your children or grandchildren applying for loans that can result in overwhelming debt, taking decades to repay. If we intend to assist with the cost of their education, we cannot put off planning until the last minute. That’s easy enough to say, but it’s harder to act on. While there are multiple means of attaining the same goal, one of the most efficient and flexible methods to save for the cost of higher education is through a 529 Savings Plan.

As a Certified Financial Planner™, I’d like to highlight some of the most frequently asked questions about using 529 plans to save for the anticipated costs of post-secondary schooling. At RS Crum, we are here to help you navigate the complexities and provide the information you need to plan for success.

Q: What is a 529 Plan?

A: The 529 Plan is a college savings vehicle designed with tax benefits. A 529 can be set up for any person intending to participate in post-secondary education (including University, Community College, Trade School, etc.). The account is owned by an individual, usually (but not limited to) a parent or grandparent, and has a designated student for whom the assets are expected to benefit.

Q: What are the benefits of a 529 Plan?

A: 529 plans have a number of benefits, the most significant of which involve tax efficiency. The two most critical tax benefits include:

  1. Tax free growth of assets within the 529 account, including the appreciation of underlying investments as well as income generated.
  2. At the time of need, withdrawals used for qualified education expenses are free from federal taxation. See the next question for what the IRS deems to be ‘qualified education expenses’.

Another key benefit is that schools do not identify the 529 assets as being “owned” by the student when determining financial aid. With some alternative educational savings plans, this is not the case.

Q: What are “Qualified Higher Educational Expenses”?

A: Money from a 529 can be withdrawn tax-free if used for qualified education expenses which include tuition and reasonable room/board. Funds may also qualify if used for books, calculators, software, and, as of recently, computer equipment and related technology services, including Internet service fees if used primarily for educational purposes.

Q: What if the student receives a scholarship or does not go to college?

A: If the intended beneficiary does not elect to participate in post-secondary studies, there are a couple of options available for the assets held within 529 plans:

  1. You can change the student for which the 529 assets are to benefit. This is simply redirecting the money to a different family member or generation.
  2. You can withdraw the assets for any other purpose and close the 529. In doing so, be advised the assets from the plan will be subject to taxes and incur a 10% penalty.

Q: What can I do if I’m uncomfortable trying to manage the investments myself?

A: Some 529 plans offer online tools or basic assistance with investment decisions, but it’s ultimately up to the account owner to choose. Many funds offer age-based investment strategies which automates changes in investment allocation as the intended student gets older. Some financial advisors will provide guidance as part of their service. RS Crum, however, is willing to assist our clients with their 529 accounts as a courtesy within our full service wealth management platform.

I hope the above information empowers you to move forward and take the next step with regards to higher education planning. As you are taking care of their today, we appreciate helping you to prepare for their tomorrow.