As parents or grandparents, we all want the best for our children, including providing them with the opportunity for an advanced degree or other educational program. However, with rising college costs, planning for this milestone can be daunting. That's where 529 plans can provide significant assistance. These plans have become even more attractive with the passage of the Secure Act 2.0 (thanks US government!)…but more on that later.
We would caution that some 529 plans are better than others and some advisor run plans come with hefty fees associated with them. That’s why it is always a good idea to consult with a fee-only financial advisor prior to selecting a plan to ensure it is properly invested. This ensures your hard-earned dollars are going to the student and not to an advisor who puts you in a target-date mutual fund and gets a hefty commission.
You’ve been warned.
Now…on to the benefits!
One of the most significant advantages of 529 plans is their exceptional tax benefits. Contributions made to these plans grow tax-free, and when used for qualified education expenses, withdrawals are also tax-free at the federal level. In many states, contributors may also enjoy tax deductions or credits, further incentivizing saving for education.
The Secure Act 2.0 includes a rollover provision that allows up to $35,000 in 529 plan assets to be transferred to a Roth IRA. There are a few rules in doing this such as adhering to the annual Roth contribution limits and the account needs to be owned by the beneficiary for 15 years, but this allows even more flexibility and addresses some concerns about potentially overfunding the account.
High Contribution Limits
With 529 plans, you can save significantly more compared to traditional savings accounts. Most states offer high contribution limits, allowing you to set aside substantial funds to cover tuition, books, room, board, and other qualified expenses.
Generous Gifting Opportunities
Grandparents, relatives, and friends who want to contribute to a child's future education can do so by gifting money to the child's 529 plan. This presents a wonderful way to involve loved ones in securing a bright academic future.
No Income Restrictions
Unlike some other education savings options, 529 plans have no income restrictions, making them accessible to families of all income levels. This means anyone can take advantage of these powerful savings vehicles.
Paying for Private K-12 Education
Not only can these plans be used to pay for college educations, but they can also be used to pay for private elementary, middle and high school educations. This could further incentivize parents and grandparents to contribute to these plans assuming your state offers a tax benefit in doing so.
Flexibility in Beneficiary
One of the unique features of 529 plans is the flexibility in changing beneficiaries. If the intended beneficiary decides not to pursue higher education or receives scholarships, you can easily switch the funds to another family member.
529 plans are an exceptional tool for anyone looking to save for current or future education expenses, but there are still a few things you need to investigate before starting one. The combination of tax benefits, investment flexibility, and generous gifting opportunities makes these plans a standout choice. We would highly recommend exploring the benefits of 529 plans and incorporating them into your education savings strategy. If you have questions on your specific state plan or what might be the best option for you, let us know and we will do our best to help!
Authored by Stephen Blahovec and Michael Rausch of North River Wealth Advisors. We are an independent, fee-only financial planning and investment management firm located in Pittsburgh, PA servicing clients locally and across the country. To learn more, contact us here.
This content is developed by North River Wealth Advisors from sources believed to be providing accurate information. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.