The Benefits of a 529 Savings Plan

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Hello, readers! Welcome back to the Hoods Tax & Accounting blog! We’re delighted to be able to share up-to-date information about taxes, savings, and financial literacy—giving you the tools you need to meet your short and long term goals. Whether you’re managing taxes for your small business or wondering how to take advantage of certain tax credits, we’ve got you covered! Our previous post about how to avoid impulse spending is available for your reading pleasure and we hope you’ll return to the blog for our upcoming series on cryptocurrency!
 
Today, we’ll be discussing a hot topic for parents and students alike—a college savings plan! Most parents save for their kids college fund the old fashioned way, by allocating a portion of their monthly income into a standard savings account over a number of years. However, we are here to tell you there’s a better way! There are savings plans created specifically for the purpose of paying for your child’s education-related expenses and which allow multiple family members to pay into the fund! According to Peter Mansfield, the chief marketing officer for U-Nest (an app which allows savers to open 529 plans), about seventy percent of families are unaware 529 plans exist. And, according to a 2018 study done by Morningstar, families are missing out on an estimated $237 million in future educational savings due to the misuse (or lack of use) of 529 savings plans. 
 
In this article, we’ll discuss what a 529 savings plan is, its stipulations, and its benefits. Therefore, if you’re interested in making your money work for you, read on!
 
What is a 529 Savings Plan?
 
A 529 savings account is a tax advantaged savings account which allows for tax-free growth and tax-free withdrawals on qualified expenses. Traditionally, these savings accounts have been used to pay for expenses related to attending colleges and universities, including: 

• Tuition
• Room & Board
• Books
• Fees

In actuality, there are two types of 529 savings plans. The first type of plan is referred to as the prepaid tuition plan. This plan allows individuals to buy tuition credits for future use at today’s prices. However, the prepaid tuition plan cannot be used to pay room and board or expenses unrelated to tuition. Which is why the second type of 529 savings plan—the education savings plan—is considered the more flexible option of the two. The education savings plan allows individuals to pay for any of the education-related expenses stated above. As well, this type of plan can be invested in higher-risk, potentially higher-return options like stock funds. Though, keep in mind, the value of this savings plan is not insured by either state or federal governments. This means potential losses are your responsibility. 
 
How do I set up a 529 Plan?
 
Before setting up a 529 savings plan, you’ll want to shop around at a multitude of financial institutions to find the best option for you. The key elements to keep in mind when comparing savings plans are: low costs, good benefits, and a solid investment track record. Low costs means the institution isn’t charging outrageous fees to open an account or for its servicing of your account. Any money spent on fees is money which isn’t going into your account. Good benefits could include tax deductions for contributions. Only select states (i.e. Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, and Pennsylvania) offer deductions on state income tax for contributions to a 529 savings plan. Finally, a solid investment track record means the institution has shown a consistent ability to increase its savers’ contributions (especially in years when the market did well). Depending on your goals and the age of your child, you might prefer an institution with a more aggressive or conservative investment style. 
 
Next, you’ll want to name a beneficiary. This can be your child, grandchild, niece, nephew, or yourself. Yes, that’s correct—you can open a 529 savings plan for yourself. If you’re looking to accelerate your career by going back to school or switching your career entirely, a 529 savings plan can be used for eligible graduate programs. Or, you might consider investing in a 529 savings plan as a career emergency fund. The coronavirus pandemic saw massive job loss and wage cuts. Many individuals are rethinking their career path and their job security in the wake of the pandemic. A 529 savings account can be a good way to prepare for the unexpected. 
 
You’ll need to name contributors. Again, this can be anyone related to you or your beneficiary. 
 
After you’ve set up your account, chosen the type of savings plan you prefer, named a beneficiary and contributors, the only thing left to do is contribute after-tax money and watch your savings grow! 
 
How did the SECURE Act change 529 Plans?
 
The SECURE Act, passed in 2020, changed how the 529 savings plans could be utilized and actually broadened their use. Now, the list of qualified education-related expenses extends to upgrading technology (such as computers and laptops), purchasing printers, internet service, necessary software, and anything else required by the beneficiary’s institution to adequately complete their education. 
There’s more! The education savings plan can now be used to cover K-12 private school tuition (some limitations apply). This means you can invest in your child’s entire education before they’re even born! 
 
As well, 529 savings plans have been approved to pay off up to $10,000 per year in qualified education loan repayment. Student loans have been a hot topic as of late, as more and more studies show the millennial generation struggling to retain wealth at the same rate as their predecessors due to crippling student loan debt. No parent wants to see their child struggle to live because they choose to pursue an education. Likewise, no individual wants to be plagued with paying student loans for upwards of thirty years. Even if you did not invest into a 529 savings plan prior to your child going to college, you can still help them pay off their loans quicker!
 
Hold on, there’s more! Registered apprenticeships, certified by the U.S. Department of Labor, are also eligible to be paid for with 529 savings funds. Apprenticeships are an avenue to earn credentials and experience, learn a craft hands-on, and jumpstart your career. Certified apprenticeships might include software engineering, business analysis, or even working on The Late Show with Stephen Colbert! To explore potential apprenticeship opportunities, click here.  
 
We’re almost finished! Finally, if the chosen beneficiary of a 529 savings plan does not utilize the entirety of the savings fund, the remainder of the funds can potentially be transferred to a qualified sibling or relative! You can rest assured knowing each dollar you put into a 529 savings plan can be used to your or your child’s benefit. 
 
 
To reiterate, the benefits of a 529 savings plan are: The ability to have your savings invested and grow at a rate far faster than an average savings account. The ability to both investment gains and tax benefits, including the state income tax deduction (in qualifying states). The flexibility to choose the plan which works best for you and your family. The ability for multiple family members to contribute to a single plan, as well as for a single plan to rollover to multiple family members. As well as much, much more! The benefits of a 529 savings plan for families and individuals are endless. Allow your savings to work for you and invest in a 529 savings plan today! 
 
As always, we’re happy to be able to provide you with the most relevant, up-to-date tax information for you and your family. From savings plans to tax credits to business acumen, the Hoods Tax & Accounting blog is your one-stop shop for everything you need. We offer tax preparation, bookkeeping, payroll, and QuickBooks services. If you have any questions or are interested in a consultation, please reach out! We do offer virtual consultations over Zoom, as part of our effort to accommodate everyone in these trying times. We look forward to hearing from you! Until next time, thank you for reading! 

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