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Happy 529 Day! - An Excerpt from Our Dashboard

It’s 529 Day! Get it? (Yeah, it took me a moment too…)

Despite their increasing popularity, studies continue to show that most Americans have no idea what a 529 plan is. Even among parents that are actively saving for their children’s college education, most do not use a 529 account.

If your employees are trying to plan the futures of their children on top of trying to work, you can already imagine the negative impact that's having on your retention and productivity. Thankfully, our Financial Guide team works directly with your employees to handle these exact kinds of issues in so many ways—from our fully staffed helpline of financial experts to our massive dashboard of educational courses and finance tools.

Below is an excerpt of an educational breakdown of 529 accounts your employees can dig into when they access our dashboard:

  • A 529 plan is a special type of savings account for education expenses. Each state administers its own 529 plan.
  • Interest and dividends earned on money contributed to a 529 account compound tax-free. 
  • When you make a withdrawal from the account, you do not pay federal or state income taxes on the withdrawn amount if you use it for a qualified educational purpose.
  • On top of that, some states will give you an extra tax incentive for your contributions to a 529 account.
  • While the usual scenario is that a parent (the owner) opens a 529 account for their own child (the beneficiary), a grandparent can also open a 529 account for their grandchild. (You can even open one for yourself!) And anyone – even a non-family member – can contribute to a child’s 529 account. 

Now, you likely still have lots of questions…

  • Just what is a qualified educational purpose? The most obvious example is tuition and fees at a post-secondary educational institute, be it a college or university (undergraduate or graduate program), or a vocational program. But additional costs are also eligible, such as room and board, and necessities such as books and computer equipment. You can find a comprehensive list here.

In addition, there were changes in federal law in 2017 (Tax Cuts and Job Act) and 2019 (SECURE Act) that made 529 even more attractive…for some. The list of qualified expenses for a federal tax benefit was expanded to include student loan payments and expenses related to K-12 education. (There were other changes that increased the amount that can be contributed to 529 plans, and that enabled rollovers to an ABLE account from a 529 plan.)

Why only “for some”? Because some states have not expanded their definition of qualified expenses to include student loan payments and K-12 education. In those cases, a withdrawal for K-12 and student loan repayment purposes would be penalty and tax-free at the federal level, but taxable and penalized at the state level. (Remember: For states with an income tax, expanding the use of 529 plans results in a loss of tax revenue, hence their hesitation.)

  • Do I have to open a 529 plan in the state that I live in, or where my child will attend school? The short answer is “no.” You are free to choose a 529 in any of the 50 states and the District of Columbia. (Pop Quiz: After New York, which state has the most assets in 529 plans? You get the gold star if you said…Nevada!) The longer answer is that if your state offers an additional state tax benefit for contributions to a 529 plan, such as a tax credit, you will likely want to take advantage of that. 
  • How is my money invested when I use a 529 plan? 529 plans will typically offer a variety of mutual funds or exchange-traded funds as investment options, very often geared to the year in which your child is expected to begin school.
  • How much can I contribute to a 529 plan? Quite frankly, a lot. The usual annual contribution limit is presently $16,000, and there are recent provisions that allow “super funding” of five times that amount in a single year.
  • What happens if my child does not need the money that I saved in a 529 plan? You can easily change the beneficiary of the account to any other child in your family, including grandchildren. But if you do withdraw money from the account for non-qualified expenses, you will owe taxes and penalties on the account earnings. As well, if you received any additional state tax credit for your contributions, you will likely have to repay that.
  • How does having a 529 affect my child’s eligibility for financial aid? When you and your child apply for financial aid using the FAFSA (Free Application for Federal Student Aid), the amount of money held in a 529 account is considered to be an asset available to meet the cost of education. The good news is that at most only 5.64% of the account value is counted, which makes the 529 plan even more attractive as a college savings vehicle than “regular” types of savings accounts. In addition, the Department of Education has proposed a change – to take effect on the 2023-2024 FAFSA – that would entirely exclude income that a student receives from grandparent-owned 529 accounts.

One recent study found that while parents say they expect to meet 30% of the cost of their child’s college education, they usually are only able to pay for 10%. That’s pretty sobering. While there are certainly other ways to save for education, a 529 plan may be the one that can help you meet your expectations most efficiently.

What should you do next?

  • Complete the Your Money Line How To Save for College” course. 529s are only part of the college savings story!
  • Master the basics of investing in a 529 plan. The Security and Exchange Commission (SEC) has links to easy to use resources here, geared especially to the 529-curious.
  • Understand your 529 plan options. This is a terrific tool that allows you to compare 529 plans across the nation, contrasting metrics such as state tax benefits and investment fees and options.