The greeting card companies might not acknowledge it (yet), but for me, May 29 (5/29) is a special day. It’s an opportunity to remind people of the importance of saving and investing for college—in particular, doing so via a tax-advantaged 529 college savings plan.
This is especially important in the current environment, as lower market returns and the threat of volatility have investors increasingly sidestepping the markets. If you’re not saving and investing, you’re very likely setting up to incur potentially significant debt to pay for college. And debt is expensive—by a ratio of more than 2 to 1. Every dollar you save for college today can equate to over $2.50 you won’t need to pay back on a loan in the future. Our calculations are based on a combination of an un-subsidized Stafford loan (assuming a 25-year term and 4.9% interest rate) and private loan (with a 25-year term and 9% interest rate).
The burden of debt is not only financial. Studies have found that college grads saddled with large loan payments often compromise in their career choices (choosing pay over passion), opt not to pursue graduate degrees, can’t afford a car or home, delay marriage and children, and sometimes resort to bankruptcy.
With that in mind, I’d like to mark May 29, by acknowledging 8 things worth celebrating about the 529 college savings plan:
Tax-free withdrawals … for life. Your contributions to a 529 account are professionally invested and the earnings, when withdrawn, are free from federal (and sometimes state) income tax when used for eligible college expenses.
Beneficiary flexibility. The 529 plan account owner, not the beneficiary, controls the account. This means you can assign another eligible family member, even yourself, to be the beneficiary, if plans change.
Financial aid friendly. When it comes to financial aid, it’s a benefit that 529 assets are owned by the account holder (generally mom and dad) and not the beneficiary. That’s because only 5.6% of parental assets are considered when calculating financial aid figures, versus 20% of student assets. (Placing a beneficiary’s custodial account into a 529 drops the treatment to 5.6%.) Notably, more and more grandparents are opting to open 529 accounts, and 0% of grandparents’ assets are factored into financial aid calculations, but there are some implications once the money is used.
No restrictions on…
… income. Unlike other savings vehicles, such as IRAs, 529 plans do not limit or prohibit participation based on a high-income threshold. Anyone can invest.
… age. There are generally no time or age limits on use or distribution of plan assets, so monies can remain in the account and grow in perpetuity (except in Virginia), even transferring to multiple beneficiaries across time. Worst case, plan assets can be returned to the account owner but subject to income taxes and a 10% penalty.
… state. You can invest in any 529 plan from any state, not only your state of residence. Of course, some plans may offer state tax and other benefits to residents, so it pays to do your homework. Also know that you can use 529 plan assets at any eligible school in any state, regardless of whether that state is the one sponsoring your 529 plan. So assets from a Florida 529 plan, for example, can be used to fund expenses in New Jersey.
… school type. 529 assets are for four-year schools and more. The assets can be used for qualified education expenses at a long list of two-year colleges, trade schools, graduate schools and even some international institutions. Savingforcollege.com offers a useful tool for determining whether the institution you’re interested in is 529 eligible.
… number of accounts. A single beneficiary can have multiple accounts. This might mean two accounts in the parents’ name or one in a parent’s name and perhaps another in a grandparent’s name in a different state. This can help maximize state tax benefits. The amount that is eligible for a state tax deduction is subject to an annual cap, so you might want to contribute the max to a state plan first, then invest any excess in another favorite plan to diversify your exposure and spread your investment risk.
Of course, this only scratches the surface. But hopefully my personal celebration of 529 Day will encourage you to contact a financial advisor and get started on funding the gift that keeps on giving—a college education.
Rob Kron, Managing Director, is the head of Investment and Retirement Education for BlackRock’s U.S. Wealth Advisory group. He provides practical information on topics that are important to every saver and investor of every age. He is a regular contributor to The Blog.