If you have young children, college may seem a long way off. As the saying goes, the days are long but the years are short. You may not be thinking about college now, but before you know it, they’ll be visiting colleges and filling out applications. That’s why it’s important to plan ahead. As with any major expense, the sooner you start saving, the better. But if you haven’t started saving for your child’s college education yet, there’s still time. One of the best ways to save for college is with a 529 plan. In this article, we discuss some important benefits to consider when thinking about paying for college with a 529 plan.
Why Is it Important to Save for College?
Tuition rates have increased at a faster pace than many other expenses over the past decade, rising 9.24% from 2010 to 2022 for a 4-year public institution.As with retirement savings, starting early and harnessing the power of compound interest is the key to a successful college savings plan. With that in mind, let’s discuss six important benefits of using a 529 plan to save for college.
The Benefits of a 529 Account
A 529 plan is a state-sponsored education savings account that allows earnings to grow tax-deferred. There are two categories of 529 plans: prepaid tuition plans and college savings plans.
Prepaid plans let you lock in future tuition costs at today’s prices, which can be enticing. On the other hand, college savings plans have no age or income restrictions. While there are no annual contribution limits for college savings plans, there are maximum aggregate limits. These are state-specific and vary anywhere from $235,000 to $550,000 per child. You can then use these assets tax-free for qualified education expenses. It’s important to note that these aggregate contribution limits are as of 2023 and have not yet been updated for 2024, so they may be adjusted.
1. Tax-Free Earnings
You do not have to pay taxes on earnings in a 529 as long as the funds are used for qualifying higher education costs.
2. State Tax Deductions
Many states offer income tax deductions for contributions made by residents of their state, but you should check to confirm. For example, California does not provide a deduction,but Virginia taxpayers may deduct up to $4,000 per individual account owner, per beneficiary of 529 plan contributions each year.
3. Plan Flexibility
One of the benefits of 529 plans is that you can transfer the funds to another family member or relative if your child does not end up using the assets.
Contributing to a 529 plan is not a privilege reserved for the parents of the beneficiary. Anyone can contribute to your child’s college savings plan, including grandparents or other family members.
529 plans can be a useful estate planning tool for grandparents interested in helping to fund a child’s college expenses. As of 2024, a grandparent can contribute up to $18,000 per year (up to $36,000 for a married couple) to a beneficiary’s plan free from federal gift taxes. They can also accelerate the gifting schedule by making a lump-sum contribution of up to $90,000 to a grandchild’s 529 plan in the first year of a five-year term (up to $180,000 for a married couple filing jointly). To help illustrate the wealth transfer benefits of this approach, a grandparent with five grandchildren could immediately remove up to $90,000 from their taxable estate by contributing to five separate 529 plan accounts.
4. Alternate Ways to Use the Money
If your child chooses not to go to a 4-year college, the good news is that you can still use your savings from a 529 account for other things. Account holders can use up to $10,000 annually on pre-college educational expenses, such as K-12 private or religious school tuition. This includes tuition expenses at private, public, and religious K-12 schools. And thanks to the SECURE Act of 2019, you can also use your 529 savings to pay for apprenticeship fees or up to $10,000 of qualified student loan repayments (including those for the 529 plan recipient’s siblings).
5. Control of Funds
There is no need to worry about the beneficiary mishandling the funds because you, the account holder, remain in control of the assets. The child you are saving money for is the named beneficiary of the account, but you are still the account owner and they cannot bypass you to access the funds.
6. Financial Aid Is Still Possible
Your child’s 529 account does factor into the Free Application for Federal Student Aid (FAFSA) calculation if the account is in the parent’s name. Up to 5.64% of the parent’s assets will count against the student’s financial aid eligibility. A 529 plan owned by a grandparent, however, does NOT impact a student’s eligibility for need-based financial aid. Previously, while a grandparent-owned 529 plan was not counted on the FAFSA, the distributions were considered untaxed income for the student and would, therefore, affect their eligibility for need-based financial aid. Starting with the 2024-25 school year, however, these distributions will no longer be reported, which means a student may be eligible for more financial aid.
Ready to Get Started?
As you can see, there are many benefits to saving for college with a 529 plan versus other saving methods. We hope this article provided helpful information for you to make a decision about saving for your children’s college education.
At Wilkinson Wealth Management, we give advice tailored to your needs, so you can focus on what matters most. Whether preparing for retirement, planning for your family’s education, or adapting to major life changes, we serve as a trusted partner to help you chart a path forward. We would love to answer your questions, explain your options, and help you move toward your goals for college savings. Reach out to us at 434-202-2521 or use our Contact Us page to schedule an appointment.
Dustin Ciraco was hired as a Client Services Associate at Wilkinson Wealth Management in June of 2022. He moved to Charlottesville in 2018, when he accepted a position at the University of Virginia as the Financial Education Coordinator in Student Financial Services. He has a BS in Sports Management with a minor in Business Administration from the University of Florida (Go Gators!) and is a CERTIFIED FINANCIAL PLANNER™ professional.
Dustin is married to his lovely wife, Lauren. Together they have a dog, Luna, that they enjoy taking on adventures as a family.