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It's 529 Awareness Day! Here's What You Need to Know for Your Child's Future

Today is 05/29, which the financial community celebrates as 529 Awareness Day. See what they did there with the date and name?


But what is a 529 plan, and why should you care?


What is a 529 plan?

529 plans are investment savings plans that provide tax advantages to encourage parents and grandparents to save for a child's future education needs.


A 529 plan generally allows money to be deposited into an investment account and grow tax-free for future education-related expenses. In some states, a contributor can receive a tax deduction on their state income tax return depending upon which type of plan they are funding. 


Historically, 529 plans only gave preferential treatment for funds used towards higher education, but this changed in recent years, and now these plans allow for funding certain K-12 expenses.


529 plans vary by state

529 plans are state-specific, meaning that someone saving for future education expenses for a child in California will have different rules to follow than someone saving in Minnesota or Florida.


The reason for these differences is that each state sets its own rules and chooses to meet all or some of the guidelines outlined by Congress while adding additional caveats to its specific plan.


However, generally speaking, 529 plans operate under some basic premises.


How do 529 plans work?

Firstly, 529 plans have a variety of styles, with college savings or prepaid plans being the most common. 


Under the college savings plan structure, funds are deposited and can grow tax-free in various preselected investments. No taxes or penalties are owed on funds withdrawn if the money is used for qualified education expenses. If a non-qualified withdrawal occurs, i.e., the funds are not used on approved education-related expenses, taxes are owed, and a 10% penalty is assessed on any earnings. However, there are exemptions to taxes and the 10% penalty, such as reimbursement for scholarships the beneficiary receives. 


Under the prepaid plan format, tuition is prepaid at the current tuition rate, potentially many years before the child's expected start date. While prepaid plans may sound appealing, their lack of versatility means that considering one warrants increased scrutiny.


What are qualified education expenses for 529 plans?

Some of the most common qualified education expenses for 529 plans include:

  • College, trade/vocational, or K-12 school tuition

  • Room and board if the student is attending college at least halftime

  • Computers and other technology-related education expenses

  • Books and other school supplies, which each school determines the allotted budget

  • Student loan repayments of up to $10,000, depending upon the state


What happens if my child doesn't use all of their 529 plan money?

There are many scenarios under which a child becomes an adult and doesn't use the funds at all or in their entirety. In such situations, the person who manages the 529 plan, often a parent or grandparent, may change the beneficiary to a different recipient, such as a sibling or another grandchild. 


Funds can also be rolled into a Roth IRA, though there are many restrictions and caveats, which we will save for a future post. Additionally, funds can be withdrawn without taxes or penalty if the intended recipient goes to a U.S. Military Academy!


Lastly, in the unfortunate scenario, the child for whom the funds were intended becomes disabled or dies, then the funds can be used for their expenses or withdrawn without taxes or penalties. 


529 plans are fantastic!

In closing, 529 plans are a meaningful way to help save for a child's future education expenses. With different plans available to select from every state, you are not bound to choose the one where you reside. However, it is essential to weigh the benefits and drawbacks depending on your situation and that of the beneficiary.


If you want to establish a 529 plan but have questions, we are here to help. Please call us today to schedule a consultation so we can learn more about your unique situation. We will look forward to talking with you soon!

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