Is a 529 the best way to pay for college? Several updates might make this true
While legislators continue debating and arguing over college loan repayments, parents continue searching for ways to supplement their kids’ college aspirations. One of the most popular ways to save has been a 529 savings plan but everyone might not be aware of what it is. Read on below for all things 529 plus 2024 updates to it that might entice you to open one up today,.
Definition of 529 Plan
The 529 plan derives its name from this section in the Internal Revenue Code. It was created in 1996 though initially it wasn’t intended as a college savings fund. Through several iterations, it has become what is commonly known now as a 529. It is an investment vehicle intended to help pay for college tuition. The account is typically opened by a parent or grandparent with their child or grandchild named as the beneficiary. The account value is tax deferred and as long as the money is used for qualified education purposes, federal and state taxes won’t be levied. In many states, even the contributions can be tax free.
Besides the generous tax deductions, there is generally no cap to contributions. Some state plans do limit yearly deposits, so please be sure to check each plan for specifics.
Take a look at this chart and it’s easy to understand why saving earlier rather than later for your child’s education is so important.
Two kinds of 529 plans
There are two ways that a 529 can be funded-either as an education savings plan or a prepaid tuition plan. Though the education savings plan is more common, there are many who choose the prepaid tuition option.
Education Savings Plan
Money is invested into a investment custodial account, with the child receiving control over the account at 18.
The account can be self managed or auto managed through a brokerage firm or even states. All 50 states except for Wyoming offer a 529 plan. Click here to find your state’s fund and remember, most states don’t require you to be a resident to open a 529 in their state.
These accounts are commonly set as a target date fund, which means that the level of risk is adjusted as the child approached 18 years old, with the account becoming more conservative as the target date approaches.
Funds can be used up to $10,000/year for qualified K-12 expenses
Prepaid Tuition Plan
More limited in availability vs the education savings plan
The idea is to lock in tuition now for someone who won’t be attending for a while
While the money is tax deductible like the savings plan, there are limited number of colleges who accept this plan, and the money isn’t guaranteed by the federal government. Even some state plans don’t cover losses.
529 plans can go a long way in covering more than just tuition.
What does a 529 plan cover?
College, graduate or vocational school tuition and fees
Elementary or secondary school (K–12) tuition and fees
Books and school supplies
Student loan payments-based on Secure Act of 2019
Room and board
Computers, internet, and software used for schoolwork (student attendance required)
Special needs and accessibility equipment for students
Certain apprenticeship programs-based on Secure Act of 2019
Recent updates to 529 plans
There are several recent updates that may encourage parents and grandparents to open a 529 plan for their little one.
As mentioned above, the Secure Act of 2019 allows up to $10,000 of a student loan to be repaid through earnings of a 529 plan as well as covering the tuition for registered apprenticeship programs
A few years later, the Secure Act of 2022 allows up to $35,000 of a 529 plan to be rolled over into a Roth IRA as long as the account is at least 15 years old. This helps increase the flexibility of what the earnings from a 529 plan can be used for, as the Roth IRA has no restrictions as to how funds can be used
Grandparents and 529 contributions
Most prospective college applicants and their families are aware of FAFSA-Free Application for Student Aid. This is one of the first steps in inquiring about availability of financial aid. The 2024-25 application may allow grandparents to contribute more to a 529 plan without affecting their grandchild’s eligibility for financial aid.
FAFSA is a form that prospective students fill out to aid them in their search for federal funding towards colleges and career schools. Funding includes grants, scholarships and loans. For the 2024-25 school year, distributions from a 529 account in a grandparents name will not be considered on the application and therefore won’t impact the amount of financial aid that could be awarded. While your grandparent may still hae to figure out how their retirement assets impact medicare and other social services, they can feel assured that, if they have additional means or can afford to, contribute much more to their grandchild’s 529.
While there are now more diverse pathways to academic enrichment and career foundations after high school, attending college is still one of the top choices for many parents and students. There’s no real downside in considering a 529 plan for your child and with recent changes, it may have become an even better option.
