Did you know that May 29th is recognized annually as National 529 College Savings Plan Day? Unfortunately, a low percentage of Americans recognize a 529 plan as an education savings tool. We all know that paying for college is a major expense, which is why we would like to raise awareness this month of the many benefits that this investment vehicle can offer.
What is a 529 College Savings Plan?
529 Savings plans are tax-advantaged investment accounts designed to encourage saving for future education expenses. Anyone can open a 529 account for the student in their life, and they were designed to encourage Americans to save for future education expenses. The performance of these plans is based on the investment strategy chosen by the contributor/account owner, which often includes various mutual fund and exchange-traded fund (ETF) portfolios and a principal-protected bank products. These portfolios may include static and age-based portfolios (target-date portfolios).
Federal Tax Benefits
When you invest in a 529 plan, there are a range of federal tax benefits available. Some states also offer income tax incentives when contributing to that state’s 529 plan. Investments within this type of plan grow on a tax-deferred basis (contributions grow free of federal and state income taxes while in the account), and distributions are tax-free when used to pay for qualified education expenses. These expenses include college tuition/fees, books/supplies, select room & board costs, and even up to $10,000 in K-12 tuition each year. An added benefit is the ability to claim a qualified expense of up to $10,000 in student loan repayment per beneficiary and per sibling! That’s extremely helpful for many students who had to take out a loan to cover their expenses. Lastly, it’s important to remember that if the money in the account is used for something other than the qualified education expenses mentioned above, a 10% penalty will apply.
Grandparent Loophole
Students are required to report untaxed student income on their FAFSA (Free Application for Federal Student Aid) forms when applying for financial aid. However, going into effect for the 2023-2024 school year, new FAFSA rules will not require students to report any cash funding they have gotten for college when applying for financial aid. This means grandparent-owned 529 accounts will not impact a student’s eligibility for financial aid. That is why many parents encourage family members to contribute to their children’s 529 plans for birthday/holiday gifts. It’s the gift that keeps on giving by growing!
Where to begin?
There are lots of 529 plan options available. Each plan has different investment choices, potential restrictions, and their fees can vary. At Ranch Capital we can help a client establish a 529 plan. We can also assist in determining the right plan with low-cost investment options. Our experienced advisors at Ranch Capital have helped many families find the best 529 plan for their students’ futures!