COLLEGE PLANNING: 529 PLANS

A 529 plan is a state-sponsored plan used for college education savings. They are one of the most popular ways families save for college. 

 

The most important 529 plan factors to consider are the investment options they provide, the fees they charge, and any potential state tax benefit. Because they allow much larger contributions, they often overshadow other savings vehicles. But be careful - if you don't use 529 plan funds for education-related expenses, you'll incur a heavy penalty.

 

529 plans generally offer more flexibility and growth potential for most families than other college savings vehicles. Some other benefits include:

  • Plentiful account and investment options
  • Low(er) fees and index-style management
  • Some states offer additional tax benefits to local residents who invest in their state's plan 

[You can use Personal Capital's free software to track your personal finances, including 529 accounts]

$25,000

Good "average" tuition cost to aim for per year for public schools

$40,000 

Good "average" tuition cost to aim for per year for private schools

How Much Should You Save?

Not sure what number to put into your 529 plan? If you have a baby or toddler:

  • Shoot for funding roughly 30% of expected cost upfront (if you have it)
  • A good starting amount is $28,000 due to tax implications
  • If you don't have the funds, try starting with $250 per month
  • As your baby grows into a young hild, aim to have 50-70% of funding goal

Quiz: 529 plans are usually better for college savings than a traditional taxable account

TRUEFALSE

CORRECT

You're right!!

529 plans usually benefit over a traditional taxable account because their investment gains grow and can be withdrawn tax-free.

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INCORRECT

Sorry, this statement is TRUE!

Similar to a Roth IRA, 529 plans benefit over a traditional taxable account because investment gains grow and can be withdrawn tax free; savings into the plan are also after-tax.

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Tax benefits on 529 plans vary by state. Some states offer a tax credit, while most others offer an annual deduction on taxable income.  Some states offer no tax benefits to local residents - in these cases, residents should consider plans based on their investment options.

 

Savings in a 529 plan grow tax-deferred and, if used for qualified higher expenses, can be removed tax free. While college savings are important, you'll likely want to max out any retirement account options, such as a 401k or IRA, before you fund a 529 plan. The tax deduction and long-term deferred growth of a retirement account tends to outweigh the shorter time period for the 529.

DID YOU KNOW?

You can change your child's projected graduation year based on how aggressively or conservatively you want to invest. Just remember to review your investments often to make sure the mix is still appropriate for your circumstances.

68%

According to CNBC, 68% of investors don't know what 529 plans can do. 

Quiz: You must use 529 plan money for the person you opened the account for.

TRUEFALSE

You're right!!

Money in a 529 accout can be transferred to another qualified beneficiary to be used for qualified education expenses.

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Sorry, this is FALSE!

If one of your children doesn't attend college or doesn't need the full funds in the 529 plan, you can transfer the money to another qualified beneficiary to be used for education. Qualified beneficiaries include immediate family members, relatives of your immediate family, in-laws, and first cousins.

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Overfunding / Not Using a 529 Plan

 

Because you can incur penalties if you use 529 plan funds for non-qualified expenses, you may be concerned about overfunding or not using one. We generally recommend trageting about 70% of the total expected college costs with a 529 plan. You can then transition to a taxable savings account until you reach your target savings amount.

 

Still concerned? You may want to try fuding only your child's first two years of college. Then you can use a Roth IRA or taxable acccount - or your child can take out a loan - to fund the final years. Remember, many children get scholarships, decide to go to community college for at least one year, or decide to forego college altogether. 

Want to learn more about saving for college?

Download our free Personal Capital Education Planning Guide.

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