What is a 529 Education Savings Plan?

If you’re researching the best ways to save for college, you may be trying to determine what a 529 Education Savings Plan is and how it can be used toward your savings goals. A 529 Education Savings Plan is defined as a type of investment account you can use for education savings and is sponsored by an individual state. “When it comes to saving for college education, the 529 Plan is still the undisputed king of the hill,” commented Charles Claver, Senior Vice President and Director of the Private Wealth Advisor team for First Bank Wealth Management.

States are allowed to establish these tax-advantaged savings programs to help parents and guardians pay for a student’s qualified educational expenses.  In these programs, contributions are made to an account established for a child’s education expenses.  An investment management firm typically manages these account funds. It’s important to note, education savings accounts are not insured and losses are possible. Contributions are not tax deductible, but any growth in an account is tax-deferred and distributions used solely to pay for qualified educational expenses are federally tax-exempt. “The tax-free growth and tax-free distributions built into the 529 Plan structure,” said Claver, “make it a lot like a Roth IRA for education.”

What are considered qualified educational expenses?

• For post-secondary education, generally, tuition, fees, books, supplies, and equipment required for attendance qualify. Computers, software, peripheral equipment, and internet access also qualify if they are to be used primarily by the beneficiary while the beneficiary is enrolled at an eligible education institution.  Reasonable costs of room and board are also included if the student is attending school at least half time.  Additionally, qualified expenses include costs incurred to allow a special needs beneficiary to enroll at and attend an eligible institution.
   
• The SECURE Act expanded the definition of qualified higher education expenses to include expenses related to participation in an apprenticeship program registered with the Secretary of Labor.  This also provided for distributions for the payment of interest or principal of a qualified education loan for the student or a sibling.
   
• Generally, accredited post high-school institutions offering associates, bachelors, graduate level, or professional degrees qualify.  Certain vocational schools are also included.  Elementary or secondary public, private, or religious schools, as well as apprenticeship programs registered with the Secretary of Labor also qualify.

How can we contribute to a 529 college savings plan?

While some parents and family members contribute lump-sum amounts, many 529 savings plan accounts are set up with automatic monthly payments. Contributions to a 529 savings plan must be in cash and may not exceed the amount necessary to provide the student's qualified educational expenses.  

Are Distributions Counted as Income?

For federal income tax purposes, distributions used to pay for post-secondary qualified educational expenses are excluded from gross income, if the amount distributed does not exceed the amount of qualified educational expenses.  If a distribution is greater than the amount of qualified educational expenses, a portion of the earnings may be subject to federal income tax and a 10% penalty tax may also apply.

What else should I know about a 529 Education Savings Plan?

• The student’s name must be identified when the account is created.  Although the account owner is usually the primary contributor, other friends and family members may also contribute to help grow the education savings account.
   
• The account owner may change the recipient of the savings fund.  If the new recipient is a member of the same family, there is generally no current federal income tax liability.
   
• Amounts accumulated in a 529 education savings plan that’s operated by one state generally may also be used at qualifying educational colleges in a different state.
   
• A 529 education savings plan involves investment risk, including the potential to lose money.  Contributing to an education savings plan does not ensure that your education funding goals will be met.  It’s important to plan early and have a qualified financial advisor to help guide you.
   
• Neither the student nor the account owner is permitted to direct the investments in a 529 savings account, however, the account owner may choose from broad investment strategies that are established by the program sponsor.  

Can the 529 education savings plan impact the student’s financial aid?

Assets in a 529 savings plan are considered part of the “Expected Family Contribution” calculations.
Tax-free distributions from a 529 savings account (those used to pay for qualified educational expenses) are not counted as income to either the parent or student in the financial aid determination process.
Should Parents and Guardians Seek Professional Guidance?

“The 529 Savings Plan has a lot of flexibility built into it,” added Claver. “Anyone can save into it, there are effectively no practical limitations on amounts that can be saved, and the beneficiary can always be changed to accommodate the education needs of different students.” Individuals considering any education savings plans, including a 529 education savings plan, are faced with a number of income, gift, estate tax, and investment questions.  To help you determine the best college savings plans for you, contact a knowledgeable professional at First Bank Wealth Management. 

To find out more information, read “How a 529 Plan Works.”