Saving for College: 529 Savings Accounts

“There is no more profitable investment than investing in yourself”. 

Achieving a college education might increase your job opportunities, potential lifetime salary, and even your net worth. Learning transferable skills alongside independent study, a college education is often seen as one of the best self-investments you can make. An expensive investment at that. 

When we talk about saving for college, we usually discuss a 529 Savings Account. This enables you and other family members to invest in a plan on behalf of a beneficiary. The fund can later be used for tuition, fees, school supplies and some room & board situations depending on the circumstances. 

Some states offer tax advantages when you contribute to a 529 Savings Plan. There might also be penalties on the savings if the beneficiary doesn’t end up going to college. It’s important to determine whether this savings plan is right for you, and how best to contribute to enable the maximum advantages. 

529 For College

While the plan was originally only intended for use towards College-related costs, reforms in 2017 and now in 2020 mean that certain elementary and secondary education fees might be eligible to be paid for from a 529 account as well as vocational post-secondary education. 

On average in the US, a college education costs over $30,000 per year. At double the world average for developed nations, it’s no wonder that American’s rely on their parents to contribute to three quarters of the total college cost, on average. 

Each state has their own rules for 529 Savings accounts, including the maximum contributions, tax exemptions, and penalties.

529 For Tax Benefits

Contributions to a 529 Plan can equal tax deductions but this can vary between states. 

All contributions have a max aggregate fixed limit on contributions to a 529 Savings Account, but most people are more concerned with contributing above the “gift tax” limit. Currently you may contribute $15,000 toward a beneficiary’s 529 each year without triggering gift tax. If you are married you can contribute $30,000. You can do this for multiple beneficiaries.

Superfunding a 529 Savings Account

For those with significant assets, superfunding a 529 savings plan might be a good option. This allows an individual to contribute up to 5 years worth of the “maximum” (while remaining within the gift tax exclusion limit) in one go. This equates to $75,000 per parent, or a maximum of $150,000 if married.

This might be a good option for those with the assets as it allows for higher compounding over a shorter period of time. Usually, a 529 plan only has around 18 years to grow from the day the child is born. Superfunding gives the account the chance to acquire more interest and might equate to higher returns. 

How does it work? 

5-year gift tax averaging is applied to the amount contributed over the superfund period. This means that although superfunding exceeds the gift tax limit, the contribution is averaged out over the next 5 years worth of tax returns, allowing for parents to continue qualifying for gift tax exemption. There are exceptions to this, for example if other gifts are given during the same financial year. Therefore, it is advised to do your own research or discuss with your financial planner before committing.

529 Account Penalties

What happens if you contribute 18 years worth of 529 funds before your child decides that college isn’t the right choice? 

Since the 2020 reforms, 529 account savings may be eligible to fund vocational or trade schools as a form of post-secondary education. However, you are also able to change the beneficiary of a 529 account to another family member. Perhaps a sibling or cousin does want to attend college.

A different criteria applies if the beneficiary uses a scholarship or grant towards their education fees. You are usually able to withdraw the scholarship amount without penalty. There are several other occasions that allow for pulling out the money without penalties, such as military school. 

Even if the beneficiary doesn’t want to continue with education and there are no alternative beneficiaries, you have options. You can usually withdraw the full amount by paying taxes on any income tax exemptions you received. The funds might also be subject to a 10% penalty. 

As always, if you’d like more information about 529 Savings Accounts or other financial planning, let’s have a chat!