Introduction to 529 Plans 

By Schultz Collins Investment Counsel on September 10, 2024

When considering how to fund higher education there are multiple options. In this video, we will provide a quick overview of 529 Plans. We will talk about what 529 Plans are, things you may want to consider before investing in a 529 Plan, and thoughts beyond funding higher education. When considering your circumstances and objectives, 529 Plans may be a way for you to start saving now for future education expenses. 

A 529 Plan is an account type that is designed to encourage saving for future education costs. It can be used to save for certain educational expenses for any student in your family, including yourself. 529 plans are state sponsored, and you can select from any state, regardless of where you live, although some state plans offer residents a state tax deduction for selecting their state plan. 

The person opening a 529 Plan is the account owner or saver. The person it is opened for is the beneficiary or student. The owner and the beneficiary can be the same person. 

A student can attend a qualified school in any state and have the account holder pay for tuition using a 529 plan, with one exception. That exception is for a specific type of 529 plan, called a Prepaid Tuition Plan. This type of 529 plan enables you to prepay tuition at an in-state public college or university so that current tuition rates are locked in. These plans are only offered by a few states and are only appropriate if the beneficiary plans to attend an in-state, public college or university. 

529 Plans other than Prepaid Tuition Plans are known as 529 Educational Savings Plans and these will be our focus today. 

Now let’s take a closer look at 529 Educational Savings Plans to gain a better understanding of the potential benefits and considerations. 

Funds must be used to pay for qualified education expenses, which includes not only tuition, but also fees, room and board expenses, computers and equipment such as printers as well as textbooks. 

In general, they can be used at any college or university, including some colleges and universities outside the US. 

These plans may be used to pay for elementary and secondary school within limits (currently $10,000/year per beneficiary). 

They can also be used to pay for certain expenses required for participation in registered apprenticeship programs and qualified educational loan repayments up to $10,000 total per beneficiary. 

One of the benefits of a 529 Plan is the tax-free earnings that grow over a period of time. So, you should consider saving early, taking into account your financial situation and other goals. The longer money is invested the more opportunity it has to grow and the greater the potential tax benefit. 

As you can see in the hypothetical example saving early can go a long way. As this slide illustrates the potential value of different regular monthly investments for different periods of time and assumes an average annual return of 4.5% rounded to the nearest $50. Contributions to a 529 plan account must be made with after-tax dollars. Please note, this does not reflect an actual investment and does not reflect any taxes, fees, expenses, or inflation. 

Multiple options exist for funding 529 accounts, all of which should be done in a way that makes sense for your family.  Many plans have a minimum initial deposit and most plans have a lifetime limit on contributions. 

The return in a 529 Educational Savings Plan is based upon the investments in the account. There is typically a menu of mutual fund or ETF options, with some offering age-based options. As with most investments these plans may lose all or some of their value. 

It is important to realize that using the funds for expenses outside those we outlined earlier will result in the earnings portion of the withdrawal being subject to federal income tax and a 10% penalty. 

If your student receives a scholarship you can generally withdraw funds up to the amount of the scholarship without penalty, but you will still have to pay tax on income earned. 

It is possible to change the beneficiary on a 529 account or transfer funds to another 529 account if the recipient is in the same family. Additional funds may also be used for graduate school. There is no expiration date or limit when funds may be used. 

Lastly, with SECURE 2.0 it is possible to rollover 529 account funds to a Roth IRA for the same beneficiary. The total rollover is limited to $35,000, annual Roth IRA contribution limits apply and the 529 account must have been open for at least 15 years with the funds being held for at least the last five years. 

While there are several ways to save for an education, a 529 Educational Savings plan is just one option that may fit your families’ goals and objectives. 

We’ve only scratched the surface of 529 Plans. If you have questions or would like to learn more about 529 Educational Savings plans, or other education savings options, please reach out to us. Each person and family is unique, so contact us and we can help you find an appropriate plan.

Download a copy of the article here.

Disclaimer: Schultz Collins is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.  

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.  

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Schultz Collins and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information, or for statements or errors or omissions, or results obtained from the use of this information. Schultz Collins and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.  

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.