In case you’re hesitant about requesting this as a gift for your kids, or giving it as a gift to your loved ones, I wanted to calm your mind about some of the most common fears about 529 plans and give you some information that might help convince you that they are a worthwhile investment.
529 plans are NOT complicated to set up or make contributions to.
Setting up a 529 savings plan can take as little as 15 minutes, and all you need is some information about the account owner (the person that owns and manages the account on behalf of the beneficiary – often a parent or grandparent of the child/beneficiary), and beneficiary (the student who will be incurring the education costs and using the 529 funds). That information typically includes their name, social security number, date of birth, mailing address and general financial information (for them and/or their household). The initial investment needed to open the account can also vary depending on the plan that is selected but can be as little as $15.
Once an account is set up, there are several different ways that contributions can be made. Depending on the 529 plan that you select, contributions can be made through checks or cash to the account owner (which then can be deposited into the 529 account by the owner), automatically through recurring deposits, electronically through a gifting page or third-party contribution link (that you can easily share via email or social media), or even through Gift of College gift cards that are available online or at Toys R Us and Babies R Us stores.
529 plans are NOT a “use it or lose it” account.
If you’re worried that you will put too much money in a 529 savings account or that the child/beneficiary may not use the money, know that there are many ways to make sure your savings go to good use. First, you are allowed to change the beneficiary of a 529 plan (usually at least once each year), so if the initial beneficiary doesn’t use the money then a sibling, parent, or a future grandchild could use the money instead. Second, the money doesn’t have to be used only for undergraduate programs – it can be used for graduate school as well (and, pending the approval of The Tax Cuts and Jobs Act bill introduced by House Republicans on November 2nd, in the future up to $10,000 per year could be used for private elementary or high school expenses). Lastly, if you still can’t find any qualified education expenses to use the money on, you can still take a non-qualified withdrawal from a 529 plan. Although you will incur income tax and an additional 10% penalty on the earnings portion of the withdrawal, the principal portion will never be taxed or penalized.
529 savings plans have additional benefits that other college saving/investment vehicles don’t.
Although there are other savings vehicles that may provide tax advantages, unlike other education savings accounts and some retirement accounts, 529 plans have no income limits. Therefore, regardless of the level of your income you can create and contribute to a 529 account.
When it comes to Federal Student Aid, there are a couple of benefits that 529 accounts owned by the parent or student can provide over other college savings methods. First, assets held in a 529 plan owned by the parent or student are considered on the FAFSA (Free Application for Federal Student Aid) to be “parental assets,” for which only a maximum of 5.64% are counted when calculating the student’s Expected Family Contribution (EFC). The 5.64% is favorable compared to the 20% that other assets are counted at for the EFC calculation.
Second, you won’t have to report the funds withdrawn from a 529 plan as student income on the FASFA when they are used to pay for college, so they don’t reduce a student’s financial aid eligibility like withdrawals from Roth IRAs do. Be careful though- it is only qualified withdrawals/distributions from a 529 account that is student-owned or parent-owned that are not included as income on the FAFSA. If a grandparent (or similarly anyone else other than the student or their parent) has a 529 plan for a student, distributions made by that grandparent and used to pay the student’s college expenses will be counted as the student’s income on the following year’s FAFSA and be assessed at 50%. For example; if a grandparent pays $10,000 of college costs from the 529 plan they have for their grandchild, it would reduce that student’s financial aid eligibility the next year by $5,000. Alternatively, if the 529 account was owned by the parent or student, the same $10,000 distribution from the student-owned 529 account would not be counted as income for the next year’s financial aid eligibility.
As with all savings, the earlier you start, the better. Starting early increases the tax-free compound effect of the earnings on contributions. Even a small amount can grow significantly during a child’s elementary and high school years, putting them in a significantly better financial position once they are ready to attend college. Take the example of Twin sisters Katy and Alexa from our Financial Literacy page: even though the ages in this example don’t match up to the college savings years, it is clear to see that if you start saving earlier, because of positive compounding, you will ultimately have to contribute less money to end up with more than you would have if you don’t start saving until a later date.
So, if you ask me, a mother of two young boys, this holiday season I’d much rather contribute to my child’s educational future, with the potential to double or triple my contribution by the time they reach their college years, than buy another toy to add to the playroom!
For additional information on 529 plans and saving for college, here is a great resource: http://www.savingforcollege.com/
For a comparison of the different college savings plan options available (in addition to a 529 savings plan) here is a useful graphic: https://www.fidelity.com/learning-center/personal-finance/college-planning/college-savings-plans
Sources Used:
https://www.savingforcollege.com/articles/7-myths-and-realities-of-529-plans?page=3
www.savingforcollege.com/blog/college-savings-the-gift-parents-want-but-wont-ask-for
http://www.savingforcollege.com/intro_to_529s/does-a-529-plan-affect-financial-aid.php
http://www.savingforcollege.com/articles/five-simple-steps-to-enrolling-in-a-529-plan-758?page=1