529 college plans benefits for families
Most options offer many choices, built mainly around mutual funds
PHOENIX – If you have children who might be headed to college someday, it’s worth taking a look at Section 529 accounts if you haven’t lately. Even before, these programs were sound ways to prepare for higher education expenses, and a recent tweak makes them even better.
The accounts, named after a section of the Internal Revenue Code, are arguably the best bet going for college savings. But people harbor misconceptions about them.
Failing to understand the basics
The accounts are popular but likely could appeal to more people if the advantages were more widely understood. These accounts offer modest tax benefits and generally work like a Roth Individual Retirement Account in that you don’t get a federal tax deduction up front but your money grows tax-sheltered until it’s withdrawn.
If the proceeds then are used for a range of qualifying college expenses such as tuition, lodging, books or computers, no taxes would apply on withdrawals. The programs are sponsored by individual states in partnership with one or more investment companies. Many states offer state tax deductions or other incentives.
The website savingforcollege.com offers a way to compare the features of 529 accounts against other options including IRAs and U.S. Savings Bonds.
Failing to invest for the long haul
Parents or grandparents who set up a 529 account for a child usually have many years to work with and thus should focus on investments such as stock mutual funds that can be expected to outperform more conservative choices over time. Yet many people still park their money in low-yielding money market funds and the like, said David Kelly, chief global strategist at J.P. Morgan Asset Management.
Even with the stock market hitting record highs in recent weeks, that shouldn’t deter you from using these types of investments because when stocks reach new levels, they tend to keep rising, Kelly said.
And while several of the giant technology stocks are clearly expensive, other areas of the market are trading at more reasonable valuations, he said. Most stock funds hold a broad mix of holdings anyway.
Not letting kids understand what’s at stake
It’s not always smart to let children know their family’s wealth, but in the case of a 529 account, it can make sense. When parents or grandparents inform youngsters that there’s money building up for their eventual higher education, that can motivate them to earn the grades needed to gain admission. “It’s important for a child to know that this is what’s expected,” Kelly said.
Even when children veer from college or don’t complete a degree, the money in a 529 account still may prove useful because the money can be used to pay for apprenticeship programs, private tuition from kindergarten through 12th grade, and student loan repayments.
Not appreciating the flexibility available
The plans are highly versatile. Not sure if your kid will attend college? Then you can transfer the money in the account to another family member.
Not sure what to invest in? Most plans offer a range of choices, built mainly around mutual funds. Concerned
about income limits? There aren’t any. Plus, most plans don’t restrict how much you invest, and there are no general age requirements for getting started, though an earlier start would give your account more time to grow.
Starting in 2024, these 529 plans gained another benefit that should boost their popularity. Now, at least some money not used for college can be rolled into a Roth IRA, tax and penaltyfree, and used for retirement.
Account owners (the parents or others who set up and contributed money) can move 529 money into a Roth on behalf of the adult-child beneficiary, in his or her name. Up to $7,000 can be transferred annually ($8,000 for recipients 50 and older), up to a lifetime maximum of $35,000.
Not recognizing how financial aid factors in
If your child is exceptionally gifted or a standout athlete, a scholarship might carry him or her through college, but only about 0.3% of students earn a free ride.
“Most kids who apply for financial aid get it, but the dollar amounts aren’t high,” said Tricia Scarlata, head of education savings at J.P. Morgan Asset Management.
One relatively new change means that for financial aid under the Free Application for Federal Student Aid, the calculations no longer consider a family’s entire assets, which can make it easier to qualify, Scarlata said.
Assets held in a student’s name count most heavily, which makes financial aid harder to receive, but parental assets including 529 balances for dependent children count less while 529 balances and other money in the name of a grandparent don’t count at all.
FAFSA calculations also consider income levels, counting the student’s income most highly.
Average 529 account balances aren’t exceptionally high − about $28,000 according to a mid-2023 tally by the College Savings Plans Network, which suggests most families will need to pursue a multipronged strategy anyway.
529 accounts are popular but likely could appeal to more people if the advantages were more widely understood.