A 529 plan offers consumers a tax-advantaged way to pay for education, which is a boon for parents and other family members who want to save for their child’s education. A 529 plan offers several other benefits, including the ability to invest with potentially high-yield assets such as stock funds, rather than being limited to low-yield bank accounts.
“These plans can be used, among other things, as estate planning tools by grandparents to help their grandchildren save for college, or by a family to create a relatively flexible education fund that can cover multiple children with proper planning,” says Bill Van Sant. CFP, senior vice president at Girard, a wealth management firm in the Philadelphia area.
Here are seven great benefits of a 529 plan and why this plan could be right for you and your family:
1. Tax-free growth for education
A 529 plan gives you a tax-advantaged way to save for education. You can store money on an after-tax basis and then let it grow tax-free. When you withdraw the money for qualified education expenses, you also don’t pay taxes on the earnings. But you need to make sure you only use the money for the items that meet the plan’s rules, or you’ll pay penalties.
The limitations on benefits are one of the main disadvantages of 529 plans.
2. Possible investment options with high returns
Depending on which plan you choose – each state has its own options – you can invest in stock funds and other market-based investments. That gives you the opportunity to earn outsized returns on your contributions and the potential to beat the galloping costs of college.
Those types of opportunities, if used correctly, can far outweigh saving in a bank account.
3. Possible tax benefits for contributions
If you invest through a 529 plan, you may even be able to get a tax deduction on your state income taxes. However, not all states offer a tax break on your contributions, and you won’t get a tax break in a state where you don’t pay taxes. So choose carefully.
4. Two 529 plan types
It’s often overlooked, but the 529 plan has a lesser-known option. The two types of 529 plans include:
- A education savings plan which allows you to open an investment account that you can use for future education expenses, including tuition, room and board, books, and other costs specifically related to the education program.
- A prepaid lesson program This allows you to purchase future credits at current prices, although these are only available at participating institutions and are not available to primary and secondary schools.
Consider which subscription type best suits your needs.
5. The beneficiary can be changed
A 529 plan gives you a lot of flexibility about who can use the plan and when, Van Sant says.
“Parents can change the beneficiaries of a 529 plan in the event the originally designated child chooses not to attend college,” he says.
But you can also use the same 529 plan for multiple children. For example, if your children do not attend college at the same time, the beneficiary can be changed after the first child graduates and the plan can be used for the second child. However, it probably makes more sense to simply set up a 529 plan for each child.
You are not obliged to close the account once a child graduates or stops studying.
“529 plans can hold assets indefinitely as long as there is a living beneficiary on the list,” Van Sant says. “This means that an original beneficiary could change his mind and go back to school later in life, or he could have his own children and name those children as the new beneficiaries of the plan.”
But you can even name yourself as a beneficiary and use the money when you go back to school.
6. 529 plans aren’t just for college
Although 529 plans are generally associated with college education, they can also be used for private elementary and secondary schools. So if you pay tuition for grades K-12, you can also take advantage of a 529 plan. The expansion of the program came about as part of the Tax Cuts and Jobs Act of 2017.
The new rules also allow the use of 529 plan distributions in apprenticeship programs. Apprenticeships are now considered a qualified higher education expense if the internship is registered and certified with the U.S. Department of Labor.
7. 529 plans can be used to repay student loans
The 529 plan was further expanded in 2019 with the passage of the SECURE Act. Now, a 529 plan can be used to pay off up to $10,000 of the beneficiary’s student loans, as well as up to another $10,000 of student loans for each of the beneficiary’s siblings.
8. A 529 can be converted into a Roth IRA
The SECURE Act 2.0 has brought about a major change in how a 529 plan can be used, and it is especially relevant for those who are afraid of contributing too much or they won’t be able to use the money. Starting in 2024, a 529 plan can be converted to a Roth IRA for the beneficiary of the account.
But there are also some important details. The account must have been open for at least 15 years and the rollover is limited to the maximum annual Roth contribution. Rollovers are limited to a maximum of $35,000 lifetime. The full details of the plan are still being worked out for a 2024 rollout. But it’s even more reason to open a 529 plan sooner rather than later.
9. Anyone can contribute to a child’s 529 plan
Although parents are most likely to contribute to a child’s 529 plan, other family members can also legally contribute to the plan. That includes close relatives such as grandparents, uncles and aunts, as well as those who are less closely related. In fact, anyone can contribute to a 529 plan and name the child as a beneficiary, either through your own plan or someone else’s.
How to get started with a 529 plan
It can be easy to open a 529 plan, and you can start a 529 directly through a specific state’s plan or through a broker. You can start a plan with any state, but before opening one, do some research.
“Before choosing a 529, investors will want to evaluate the investment options of a 529 to see how these investments have performed,” says Van Sant.
Be sure to check what investment options are available and how much they cost. With good investment options you can maximize your potential returns and minimize your costs.
“Additionally, investors will need to compare and contrast investments in their own state’s 529 plan with investments in another state’s 529 plan, as there are typically tax benefits associated with investing in one’s own state 529,” Van Sant says.
A financial advisor or a site like Save for college can also help you select a program that suits your needs. It’s worth checking out Bankrate’s list of the best 529 plans to see if one is right for you.
“Once you determine which 529 suits you best, installation and financing are virtually seamless,” says Van Sant.
In short
A 529 plan is a great ally in saving enough to pay for the rising costs of college, but an even greater ally is time, because it can help you increase your profits. Combine the two by starting a 529 plan today and you can roll up a nice bundle when it’s time for school.
