Money expert Clark Howard and Team Clark have talked and written about 529 education savings plans quite a bit in the past, but with their increasing popularity and some recent changes, we thought it would be a good time to answer some of the questions about them that we hear most often.
What Exactly Is a 529 Plan and What Can I Use It To Pay For?
A 529 plan a tax-advantaged savings plan that is the best way to save for your kids’ education. Prior to this year, 529 plans would allow you, a relative or a friend to put money aside as an investment for a child’s college education. Now, thanks to changes in the tax code, money in a 529 can be used to pay for tuition at private schools for kindergarten through 12th grade, as well! The money grows tax-free and is spent tax-free for eligible expenses like tuition, books and fees.
How Much Can I Contribute to a 529 Plan?
While there is no official limit to how much you can contribute to a 529 plan, you should understand that contributions to a 529 plan are considered gifts for tax purposes. As of 2018, gifts up to $15,000 per individual qualify for the tax exclusion, so, for example, if you are married, you and your spouse could contribute up to $30,000 collectively per child without suffering tax consequences.
What Fees and Expenses Are Associated With a 529 Plan?
The fees and expenses you pay for having a 529 plan will vary depending on where you opening it. In general, you may pay an enrollment fee, account maintenance fees, program management fees, and asset management fees.
Clark has done extensive research on all the non-commission 529 plans around the country and has found that in many places the costs for you are now below the average costs for a mutual fund.
You are not required to use the 529 plan offered by your particular state (though you should if your state offers a tax break for using its plan), so shopping around for a low-cost plan that meets your needs is a good idea. Some states now have both age-based portfolios with high costs and index-age based plans with low costs. The best plans cost less than 0.4% of your balance per year. That means almost none of your money is being diverted to the 529 manager, allowing greater savings for your kids’ learning.
What Can the Money in a 529 Plan Be Used To Pay For?
The answer, straight from the Securities and Exchange Commission: “With limited exceptions, you can only withdraw money that you invest in an education savings plan for qualified higher education expenses or tuition for elementary or secondary schools without incurring taxes and penalties.”
Certain things, like room, board and supplies can only be paid for with 529 funds if the student is in college. As of now, you may not use 529 funds to repay student loans, but that is an idea that has been floated in the past.
Will Having a 529 Hurt My Chances of Receiving Financial Aid?
In general, this depends on who owns the 529 plan. If the 529 plan is owned by the dependent student who is using it or one of their parents, it will be considered a parental asset on the FAFSA (Free Application for Federal Student Aid).
Any money in a 529 plan owned by a grandparent significantly impacts the student’s chances of receiving financial aid or the amount they qualify for.
What Happens if I Invest in a 529 Plan but My Child Doesn’t Go to College?
There are a few options here. One would be to keep the money in the plan just in case the child decides to go to college or vocational school at a later date.
Another great thing about 529 plans is that they can be transferred to another qualifying family without incurring a penalty. Qualifying family members include siblings, step-siblings, aunts & uncles, and nieces & nephews. If you hold on to the plan, even the beneficiary’s own children (and grandchildren and so on!) could use the finds for qualifying education expenses.
The other (and least desirable) option is to use the money for non-educational purposes. The reason this is not recommended is that you will pay income taxes on that money, plus a 10% penalty for not using it for its intended purpose. The penalty is, however, waived if the child receives a full scholarship to college.
Should I Ever Roll Over a 529 Plan?
The IRS allows for one tax-free rollover per 529 beneficiary in a 12-month period. If you violate this rule, you get hit with federal income taxes and a 10% penalty on the accumulated earnings.
The basic method for rolling over one account into another is to fill out a rollover contribution form with the 529 plan servicer you are transferring the money into. From there, the administrator of your preferred 529 plan will coordinate moving the money from the old fund into their fund.
Our friend Wes Moss wrote a great article for us on this subject. He says that here are a few circumstances where it may make sense to move your 529 plan funds into a different account. A few scenarios include making the most of your state’s tax deduction (if there is one), to get lower-cost investments, or if your plan has performed poorly compared to other 529s and you expect the trend continue.
Have other questions on 529 plans? Please let us know in the comments below!