Happy 529 day!
I am a sucker for the quirky holidays, where there are no obligations or expectations. These are the ones that only equate to a free coffee, an excuse to make a pie, or better yet, give me a reason to talk about investment accounts.
Today, 5/29, is National 529 Day.
In celebration, here is What You Need to Know About 529 Plans
What is a 529 plan? A 529 plan is a tax-advantaged investment account used for education savings. I say investment account specifically because, unlike other account types, you have to choose an investment. They are state-sponsored - which means there are differences in plans offered by different states. BUT you can sign up for almost any state’s plan and use the funds for education expenses occurring in ANY state. (Our kids are signed up for the one sponsored by New Hampshire, given that we don’t know what state we will live in in the long term, and it’s a highly-rated plan offered through Fidelity. Plus, I can always open other accounts if we move to a new state where that would be favorable.)
Why would you want to open one? You have a goal of paying for someone’s education (be that your own, a child, a future child, a grandchild, etc.) and want to do so in a tax-advantaged way.
Why use a 529 account over another type of account? The tax savings! Tax-advantaged, in this case, means that account growth is not taxed, and when the funds are used, they are not taxed (federally and in some states) if they are used for education purposes. This could mean tens of thousands of dollars of difference in the amount available.
What if my child/grandchild/person I’m saving for doesn’t need the money? First of all, champagne problems. Secondly, it’s not as problematic anymore as 529 plans have become more flexible. ‘Education’ expenses don’t just mean 4-year college tuition. Books, laptops, K-12 private education, and paying back student loans are all eligible (with some limits). Additionally, you can roll over up to $35k from a 529 plan to a retirement plan (Roth IRA) for the beneficiary (again with some limits). Plus, whoever opens the account (the owner) can change who the funds are intended for (the beneficiary). This could mean changing the beneficiary to a sibling, another family member, or even from yourself to a child you added to your family after you started the account.
The money isn’t inaccessible; there is simply a 10% penalty plus taxes owed on withdrawals that are not used for qualified education expenses. There are exceptions, though, such as if the beneficiary gets a scholarship, which then allows penalty-free withdrawal up to the scholarship amount.
What do I need to look for when choosing a 529 plan? Start with your own state and research additional benefits. Use an online tool to check that it meets your needs (giving platform, etc.). Compare fees, investment options, and ease of use (another reason I like the NH plan is I already have a Fidelity account and can manage it through there).
Remember, like most investments, your contribution amounts will be the most significant success factor.
So, should I open a 529 account? If your goal is to pay for someone’s education expenses, it’s a great choice. Opening one and starting to contribute even a little can go a long way. It’s not all or nothing. Most people don’t pay 100% of the beneficiary’s education costs with a 529 plan, but even a little bit makes a difference.
Remember to balance your contributions with your other goals. There are student loans, but there are no retirement loans.
There are many more nuances to 529 plans (and they might change in the future), but for now, for most, I think this is what you need to know. As always, do your research.