What is a 529 College Savings Plan?


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A 529 college savings plan is a simple, straightforward tool to save for your child’s education. Contact EP Wealth for tips on choosing a 529 and maximizing your contributions. Advisors available nationwide.

A 529 college savings plan is a tax-advantaged investment account that encourages families to save money for future education costs, from kindergarten to graduate school. These low-maintenance, flexible savings vehicles are available to everyone regardless of age and income. And withdrawals are tax-free when used for qualified education expenses.

But not all 529 plans are alike. Keep reading to learn the ins and outs of college savings plans and how an EP Wealth Advisor can work with you to create an investment management strategy today—to build for a bright tomorrow.

Background on 529 Savings Plans

529s date back to 1986, when Michigan became the first state in the nation to create a prepaid college savings plan. In 1996, Congress enacted code 529 of the Internal Revenue Code, formally establishing federal tax guidelines for college savings vehicles.

However, it wasn’t until 2001 and the passing of the Economic Growth and Tax Relief Reconciliation Act, which made distributions tax-exempt, that more Americans began incorporating them into their financial planning strategies.

In 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act allowed the use of 529 college savings plans for qualified student loan repayments (up to $10,000).

Types of 529 Plans

There are two types of 529 plans:

Prepaid Tuition Plans

Prepaid tuition plans allow families to pay for college tuition ahead of time by purchasing units or credits at today’s tuition rates. Qualifying institutions generally include public and in-state schools. Prepaid tuition credits can only be used for tuition and mandatory fees. They do not cover housing, food, and books.

College tuition has been steadily rising in recent years. According to U.S. News and World Report, between 2003 and 2023:

  • Tuition and fees for private universities increased 134%.
  • Out-of-state tuition and fees for public universities increased 141%.
  • In-state tuition and fees for public universities increased 175%.

Prepaid tuition plans are an effective way to manage college costs by locking in at a lower tuition rate now, as costs are only expected to keep rising.

Prepaid tuition plans grow over time and withdrawals are not taxable. There are several ways to contribute to this type of 529. You can make a single, lump-sum payment, use a five-year payment plan, or opt to do fixed, monthly payments instead.

Prepaid tuition plans are state-administered, and the costs and guidelines for each may vary slightly. Most require the saver and/or the student beneficiary to be a resident of the state providing the plan. Some also have age or grade requirements for beneficiaries at the period of enrollment.

Contact an EP Wealth Advisor near you to find out about college savings plans in your state.

529 Education Savings Plans

529 education savings plans are more common than prepaid tuition plans, perhaps because they are a bit more versatile.

These funds can be used for tuition for public, private, and religious K-12 schools, colleges and universities, and eligible postsecondary schools and apprenticeship programs. Beyond tuition, 529 education savings plans can also be used for room, board, supplies, and fees.

529 savings plans allow savers to invest college savings in a mix of bond funds, mutual funds, and exchange-traded fund portfolios. Like 401K retirement plans, 529 savings plans fluctuate with the market.

Some 529 plans include target-date funds, which adjust their assets according to the child's age, becoming more conservative as they approach college or another qualifying postsecondary program.

How Do 529s Work? Opening and Contributing to College Savings Plans

Anyone helping to support a child’s future education can open a 529 plan: parents, grandparents, and friends. You can purchase a 529 savings plan directly from the state or financial firm offering it. If you go this route, you’re responsible for monitoring and managing your investments, typically through an online portal.

Or you can buy one through an investment firm with the guidance of a Certified Financial Planner (CFP) who can help you make informed decisions about your plan and manage your investments over time.

 All you need are a few basic facts about the beneficiary. Just like other financial accounts, you can contribute to 529s in several ways:

  • Check
  • Electronic funds transfer
  • Payroll contributions (based on your employer)
  • Automatic Investment Plan (AIP) with recurrent contributions directly from your bank account
  • Rollover / transfer from other 529 plans

 While prepaid tuition plans generally have specific enrollment periods and contribution deadlines, you can contribute to a 529 savings plan whenever you want. Because some states offer tax credits or deductions for 529 plan contributions, it’s wise to ask your EP Wealth Advisor about the best time of year to make a deposit.  

Contribution Limits

There is no limit on how much you can contribute to a 529 every year. Instead, 529s limit how much you can invest for a single beneficiary over the life of the plan. This limit varies depending on the plan, but generally ranges anywhere from $350,000 to $550,000 across the life of the plan.

Withdrawal Procedure and Limitations

529 withdrawals for qualified K-12 tuition or higher education expenses are not subject to federal income tax—and even state income tax in some cases. 529 funds not used for qualifying expenses are subject to state and federal taxes, along with an added 10% federal tax penalty on earnings. Payments go directly to the account holder, the beneficiary, or the school.

You can withdraw from your 529 plan anytime. Just be mindful to use those funds for that calendar year’s qualifying expenses, or you will be penalized. If you withdraw in November to pay a college bill in January, for example, that distribution is not considered qualified. That’s going to cost you in taxes.

Benefits of 529 Savings Plans

Many CFPs recommend 529 college savings plans for clients who want to help a child pay for college. Here are some of the reasons why:  

  • They are user-friendly: 529s are relatively easy to open, maintain, and grow over time. Withdrawals are also relatively simple.
  • They offer high contribution limits: Over the course of the plan, savers can acquire considerable savings toward the high costs of college tuition.
  • They offer room for growth: 529 plans that invest funds in securities offer more significant returns compared to traditional savings accounts.
  • They have numerous tax advantages: 529 plans offer tax-deductible contributions, tax-deferred growth, and tax-free withdrawals to maximize your investment.
  • They may cover K-12 tuition: Up to $10,000 per year of 529 education savings plans can be used to pay for K-12 school tuition. They can also be used for fees, room, board, and other costs associated with postsecondary education.
  • They have minimal impact on financial aid: Depending upon who owns the 529, the account must be declared as an asset, which can affect need-based financial aid. However, the benefits of saving generally outweigh any negative impact a 529 has on a student’s overall aid package.
  • They can be rolled over into a Roth IRA: As of January 1, 2021, up to $35,000 of unspent funds can be rolled over into a Roth IRA account in the name of the beneficiary.

529 Savings Plan Limitations

It’s also important to consider any 529 restrictions and requirements that may affect your college savings plan.

  • They offer limited investment options: 529 plans offer limited investment opportunities. For state-sponsored plans, those are up to the discretion of the administrator. Investors who are a bit more knowledgeable may find this restrictive.
  • There are penalties for non-educational use: Funds that are not used for qualifying expenses may draw tax penalties. Withdrawing at the wrong time can also trigger a tax penalty. Work with your EP Wealth advisor to minimize these unnecessary costs.
  • They differ from state to state: Rules and requirements for 529 plans are quite varied depending upon the state. A skilled financial advisor is a great resource for clarifying the plans available in your state to determine the best fit for you.

529 Plans vs Other Education Savings Vehicles

If you are researching savings vehicles for your child’s future college tuition, you’re probably wondering how a 529 plan stacks up against other options. Let’s take a look.

529 vs. Coverdell ESA

A Coverdell Education Savings Account (ESA) is a custodial or trust account created solely to pay qualified education expenses for the beneficiary. They are like 529s because they are funded with tax-free money and grow tax-free as well. They can be used for college and K-12 tuition, books, supplies, Internet access, and tutoring.

However, Coverdell ESAs only allow a maximum annual contribution of $2,000 per child, as of 2023. Also, they are not available for single and married filers who earn more than the modified adjusted gross income requirements, so not everyone is eligible. If you are eligible, you can open a Coverdell ESA and a 529 and contribute to both.

529 vs. UGMA/UTMA Accounts

Uniform Gifts to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts are both custodial accounts that allow adults to transfer cash and investments to a child. While these assets can be used for anything, including education, the child must wait until the age of majority in their state to receive them.

Because the funds in UGMAs and UTMAs are considered property of the child, they must be listed as an asset on the Free Application for Federal Student Aid (FAFSA) form, possibly increasing the family’s Expected Family Contribution by approximately 20% of the account’s value.

529 vs. Roth IRA

529s are a lot like Roth individual retirement accounts (IRAs), except they are solely designated for education. Roth IRAs are primarily used for retirement, but you can use these funds for education too.

Like 529s, Roth IRA contributions grow tax-free. With a Roth IRA, you can withdraw contributions any time for any reason, tax free, while you may face penalties if you use 529 funds during the wrong calendar year.

One major disadvantage with Roth IRAs is the low annual contribution limit: $6,500 or $7,500 for people ages 50 and older as of 2023. Also, if you use Roth IRA funds for your child’s college tuition, that’s less you’ll have to retire on.

How to Maximize Your 529 Savings Plan

There are some simple ways to make the most of your 529 college savings plan.

1.    Don’t wait.

Because 529s offer tax-free compounding, the earlier you begin contributing, the more time your money has to grow. With enough contributions you can fully fund or significantly reduce the cost of your child’s education.

2.    Automate your saving.

You can streamline this process by setting up automatic contributions in the form of payroll deductions. Your advisor can help you determine a practical amount that works for your family. If your circumstances change, you can always adjust your contributions as needed.

3.    Boost your contributions.

We also recommend making lump sum contributions when possible. Don’t hesitate to let friends and family know about your 529 when they ask for gift suggestions for your child. In fact, several online platforms make it easy for others to donate to your child’s education fund.

4.    Do your research.

Choose a plan with low fees and a good rating based on performance and features. Make it a point to check in on your 529 to make sure you’re on track to meet your goals. Your financial advisor can discuss your 529 options and keep you up to date on your progress as well.

Streamline College Savings with EP Wealth

Don’t be discouraged if you have been putting off planning for the future. At EP Wealth, we meet you where you are today. We want you to know it’s never too late to create or revisit your financial plan.

Whether you are planning for college, retirement, or just starting to grow your family—we provide customized financial solutions for every age and stage of life. Connect with a financial advisor today.





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