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What to know when considering a 529 College Savings Plan


As the cost of higher education continues to rise, parents are seeking out ways to make college more affordable for their children. One popular option is to start a 529 college savings plan. A 529 plan is a tax-advantaged savings plan that allows parents, grandparents, and other family members to save for a child’s college education.

A recent change to U.S. law provides more flexibility for 529 plan assets. Starting in 2024, 529 account owners will have the option to use excess 529 plan funds to jumpstart the retirement of their beneficiaries by allowing owners to move unused funds in the account directly to the plan beneficiary’s Roth IRA.

Here are some important things to consider when setting up a 529 plan:

  1. Eligible expenses: Make sure you understand what expenses are considered “qualified education expenses” for the plan. While most expenses, such as tuition and room and board, are eligible, some may not be. Check the specific plan guidelines to ensure you are using the funds appropriately.
  2. Tax advantages*: One of the biggest benefits of a 529 plan is its tax advantages. In most states, contributions made to a 529 plan are tax-deductible, meaning you can reduce your state income tax bill by contributing to the account. Additionally, the earnings on the account grow tax-free, and withdrawals used for qualified education expenses are also tax-free. This means that your contributions can grow over time without being taxed, which can help your savings go further.
  3. Investment options: Different 529 plans offer different investment options. Some plans offer age-based portfolios, while others offer individual fund choices. Consider your investment goals and risk tolerance when choosing a plan.
  4. Fees: Be aware of the fees associated with the plan, including administrative fees and investment fees. High fees can eat into your savings and reduce the overall return on investment.
  5. Contribution limits: Most 529 plans have high contribution limits, which means you can save significant amounts of money for your child’s education. Some plans even allow contributions up to $500,000 or more. Be sure to check the contribution limits for the plan you choose. While most plans have high contribution limits, some may have lower limits.
  6. Anyone can contribute: Unlike some other savings vehicles, anyone can contribute to a 529 plan, regardless of their relationship to the beneficiary. This means that grandparents, aunts, uncles, and other family members can also contribute to the account, making it a great way for family members to support a child’s education.
  7. Beneficiary changes: You should also know that you can change the beneficiary of the account at any time. This means that if the original beneficiary decides not to go to college, you can transfer the funds to another eligible family member without incurring taxes or penalties.
  8. Low impact on financial aid: One concern parents may have when saving for college is how it will affect their child’s eligibility for financial aid. The good news is that 529 plan assets are considered assets of the account owner, not the beneficiary. This means that they have a relatively low impact on financial aid eligibility compared to other savings vehicles.

Overall, a 529 college savings plan can be a powerful tool for saving for your child’s education. By understanding the eligible expenses, tax advantages, investment options, fees, contribution limits, anyone can contribute, beneficiary changes, and low impact on financial aid, you can make an informed decision and set up a plan that best meets your needs.

*This article is intended for educational purposes and does not constitute tax advice. Please consult your trusted tax advisor.

Investments are not FDIC insured, not bank guaranteed, and may lose value.

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