Are 529 Plans Still Worth It? Separating Fact from Fiction

I find many people drag their feet with college savings and then boom, their child is going to college!  Like mine. (The good thing is we squirreled money away.) This article comes from noticing and hearing people ask, “Are 529 Plans Still Worth It?”

529 College Savings Plans, designed to help families save for education expenses, have been a popular tool for many years. However, in recent conversations with clients, I’ve noticed a trend: some are questioning the real value of 529 plans, and others haven’t even considered them. Add in the complexities of grandparent-owned 529s, and it’s easy to see why there’s confusion.

Let’s break down the myths and realities of 529 plans to help you determine if they’re the right fit for your family.

A 529 plan is a tax-advantaged savings plan specifically designed for education expenses. These plans are offered by states or state agencies, and while they are state-sponsored, you’re not limited to using a 529 plan from your state of residence. You can shop around for the plan that best suits your needs.

The benefits of 529 plans include:

• Tax-deferred growth, meaning you won’t owe taxes on the earnings until you withdraw the money.
• Withdrawals are tax-free at the federal level (and often the state level as well) as long as the money is used for qualified education expenses.
• While designed for college, they can also be used for K-12 tuition (up to $10,000 per year per beneficiary), apprenticeship programs, and even student loan repayment (within certain limits).
• You can contribute significant amounts to a 529 plan, often far exceeding the annual gift tax exclusion, allowing for substantial savings over time.
• Additionally, if your original beneficiary decides not to go to college, you can usually change the beneficiary to another family member.

 

Some common concerns about 529 plans include:

• The possibility that the child might not go to college. However, as mentioned above, 529 plans offer flexibility. You can change the beneficiary, use the funds for other qualified expenses, or even withdraw the money (though earnings will be subject to taxes and a 10% penalty).
• Some plans even allow rollovers to a Roth IRA, subject to certain limitations.
• Another concern is the potential impact on financial aid. 529 plans are generally considered parental assets, which have a lower impact on financial aid eligibility compared to assets held directly in the student’s name.
• Some may also worry about limited investment options, but many 529 plans offer a wide range of options, including age-based portfolios that automatically adjust to a more conservative allocation as your child gets closer to college.

 

Grandparent-owned 529 plans can be a powerful tool for legacy planning and helping grandchildren avoid student loan debt. However, there are a couple of things to keep in mind. Grandparent-owned 529s are not considered parental assets. When distributions are made from a grandparent-owned 529, they are counted as student income, which can have a greater impact on financial aid eligibility. It’s often recommended that grandparents wait to distribute funds until after the student has applied for financial aid or consider gifting the funds to the parents a year or two before college. Grandparents retain control of the account and can decide how and when the funds are used.

The answer to whether a 529 plan is right for you depends on your individual circumstances. Consider your financial goals, including your own retirement, your child’s educational aspirations, and your risk tolerance. A financial advisor can help you analyze your situation and determine if a 529 plan is the best way to save for education expenses.

Don’t let misinformation steer you away from a potentially valuable savings tool. By understanding the facts and weighing the pros and cons, you can make an informed decision about whether a 529 plan is the right fit for your family.