Getting Started with 529 Savings Plans for Education

A 529 plan is a savings plan specifically for education. It was originally designed to help save and pay for university, college, career, technical or trade school, but changed in 2017 to include kindergarten through high school and again in 2019 to include apprenticeship programs.

529 plans, or “qualified tuition plans,” follow the guidelines presented in Section 529 of the IRS code and are usually sponsored by states or educational institutions.

Who can open a 529 account?

Usually, 529 accounts are opened by parents for a child or grandparents for a grandchild. Most 529 plans allow for most anyone to open an account for a beneficiary. Research the plans you are interested in to know which relationships between account owner and beneficiary are allowed.

 What fees and expenses will I pay if I invest in a 529 plan?

It’s important for account owners to understand the fees and expenses related to the investments they choose in their plan.

The fees and expenses that are charged will lower the returns on the investments, so it’s important to understand those charges.

Louisiana START Savings Investment Management Fee:

The mutual funds’ investment management fees charged by The Vanguard Group are “deducted prior to the valuation of the mutual funds’ net asset value.” This is known as an underlying fund expenses ratio. See “What are the fees charged for investing in the START Saving Program?”

Does investing in a 529 plan impact financial aid eligibility?

Each educational institution will consider the savings in 529 accounts differently, but the assets in a 529 plan will be considered when applying for need-based financial aid.

Of course, the majority of financial aid will usually be loans, and the more a student has saved, the fewer loans the student will need.

 Is a 529 Plan Better Than a Savings Account?

One consideration is flexibility. 529 plans require that the savings are used for education.  Your money in a savings account is yours to use as you wish.

However, because contributions into a 529 plan are usually invested in mutual funds or stocks, these plans generally have more potential for growth than saving your cash in a financial institution savings account.   Also, as with most investing, the earlier you get started, the more time your money has to grow and compound.

Source: Texas Prepaid Higher Education Tuition Board https://www.lonestar529.com/plan/start-early/ — This chart assumes a $5,000 lump sum investment, $100 monthly investments and 5% annual rate of return. The calculations are for illustrative purposes only, and the results are not indicative of the performance of any investments. 

Tax Advantages of a 529 Plan

Earnings:

As long as your 529 plan funds are used for qualified educational expenses, the earnings are not subject to federal or state income taxes.

Withdrawals used for qualified educational expenses, as described by the IRS, are not taxed at either the federal or the state level. (For students in kindergarten through high school, tax-free withdrawals have a limit of $10,000 per year.)

Withdrawals used for anything other than qualified expenses are subject to income taxes and an additional 10% penalty. There are exceptions to this such as if the beneficiary earns a scholarship or attends a US Military Academy, or disability or death.

Contributions:

Your contributions into a 529 savings plan are not tax-deductible on your federal income taxes.

Different states have different state tax deductions or credits for 529 savings. In Louisiana, these contributions are tax deductible,

“Are deposits to a START account tax deductible?

Deposits to a START account are deductible from Louisiana State Taxable Income up to a maximum of $2,400 per year, per account, and any unused portion may be carried forward to subsequent tax years on individual returns. Married couples filing jointly may deduct deposits to a START account from Louisiana State Taxable Income up to a maximum of $4,800 per year, per beneficiary, and any unused portion may be carried forward to subsequent tax years. Annual deposits in excess of the maximum are not deductible in subsequent years.”

If You Don’t Use the Money

What happens if you have money in a 529 plan that goes unused, such as if the beneficiary doesn’t go to college or does go to college with a significant scholarship to pay for the tuition and expenses.

• • You can leave the current beneficiary as is in case they decide to go to college or graduate school at a later date.
  • You can change the beneficiary to family member, defined as:
    • • Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them
      • Brother, sister, stepbrother, or stepsister
      • Father or mother or ancestor of either
      • Stepfather or stepmother
      • Son or daughter of a brother or sister
      • Brother or sister of father or mother
      • Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
      • The spouse of any individual listed above
      • First cousin
  • You can cash out the account paying the applicable taxes and 10% penalty.

Questions About Your Education Savings Strategy?

A 529 program is a great plan to help save for a child’s future. If you have questions about how a 529 plan will fit into your savings strategy for elementary education, technical or trade schools or college, give us a call.