“Let us not think of education only in terms of its costs, but rather in terms of the infinite potential of the human mind that can be realized through education.”
John F. Kennedy
The 529 plan is an investment plan that allows you to sock away money tax-free in an account that can be used later for educational expenses only.
Before transferring astronomical amounts of money to that higher education institution, you can put thousands of dollars into a 529 Plan.
Your invested money accumulates tax-free, which makes 529 plans great savings and planning tools. Experts advise leveraging flexible plans – funds you invest in through the account – as opposed to fixed or life phase plans.
529 Plans by State
Nearly every state has a 529 Plan, some have multiple. Because of this, and just like a Vegas buffet, Dads should spend ample time researching and selecting the best 529 for you (shout out New York, Massachusetts, New Hampshire, Ohio and Oregon!), while avoiding the worst (so sorry, Maine, Nevada (twice!), New Jersey, South Dakota and Wisconsin).
Local plans may come with all types of benefits, like:
- A tax break just for going local
- Lower annual fees (remember: “not only management and state fees but the costs of the investment portfolios themselves,” Forbes)
- The investments in the plan – crack it open and take a look at what you’re investing in first!
Advisor-administered 529 Plans
Some 529 plans are offered nationally, like the Fidelity 529 College Savings Plan, the Vanguard 529 Plan and the T. Rowe Price College Savings Plan.
How much can you contribute?
Maximum account balance limits can vary from around $235,000 to $529,000, in the case of Georgia in the former, and California in the latter. Donors to 529s can contribute whatever they want per year as long as it doesn’t exceed the max balance limit. Remember, the 529 donation is treated like a gift, so you’ll be taxed if it goes over $16,000.
Who can contribute to a 529 Plan?
Parents can contribute to a 529. Grand parents, Aunts and uncles, friends and stepparents too. It’s a contribution free for all! Plus, 529 funds are typically permitted to move from one family member to another, if necessary.
How can the 529 Plan be used?
Proceeds from your 529 investment can be used for all types of educational expenses. Even before college, you can push money into a 529 for expenses from kindergarten through high school. In college, students can use 529 withdrawals for things like tuition, computers, internet, textbooks, and room & board aligning with “cost of attendance”.
You can take out as much as you need for college expenses. This comes with a warning: only take out the exact amount needed to cover costs. Any amount taken out that isn’t used for college expenses gets hit with a 10% penalty and taxed as income.
We’re told by the experts at Fidelity that “only $10,000 total can be spent each year per beneficiary on elementary, middle, or high school tuition.”
The Risks of 529 Plans
Still, because it is an investment vehicle, the 529 plan has risk that comes with the reward. There is still a possibility of losing your investment, which scares away many investors who would rather see their money grow at a slower rate in a savings or money-market account.
The risk associated with 529 plans is comparatively low. They are not highly leveraged and plan managers are not incentivized to take big swings. Most plans are also set up like a target-date retirement fund, where the riskier positions are diversified the closer your kid gets to day one of attending college.
Looking for more on paying and saving for college? Check out this post on paying for college and this post on good money moves to make for your kids.
