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529 College Savings Plan

5 Things to Know About College Savings

by Ashley Albertson | November 24, 2021 | Financial Planning, Investment Planning, Tax Planning

Having a four-year-old means one day (and I am in no rush!) my son will grow up and go to college. He currently has a financial plan set up through his godparents, and soon my husband and I will open one for him as well. With that being said, I have been learning a lot about 529 plans recently and wanted to share some key points with those who do not currently utilize them.

5 Things You Should Know About 529 Plans

529 plans, also known as “qualified tuition plans,” are sponsored by educational institutions, states, and state agencies and are designed to encourage saving for education costs. This includes trade and apprenticeship programs as well! If you’d like to learn more about plans in different states, this article from breaks them all down. The first thing to know is that there are two types of plans you can choose from.

1. Prepaid Tuition Plan

A prepaid tuition plan has stipulations, such as not allowing payment for room and board or elementary/secondary schooling. These plans are not guaranteed by the federal government, while most are sponsored by state governments. With these plans you run the risk if a beneficiary does not attend a participating college or university of not receiving all your money back.

2. Education Savings Plan

An education savings plan allows savers to open an account for the beneficiary’s future expenses, i.e., tuition, room and board, books, and computers. These expenses are generally accepted at any college or university inside and some outside the U.S. All plans are sponsored by state governments. These plans have pre-set investment options as well. For example, education savings plans only allow the account holder to change investment options twice per year or when a beneficiary is changed.

3. Tax Benefits

Contributing to one of these plans could offer investors special tax benefits, depending on the plan and the state of residence, however it does not provide any federal tax benefits. Those 70 and older may deduct the entire amount contributed to a Virginia 529 account in one year. You can participate in almost any 529 plan across the country, no matter what state you live in. Nevertheless, you should look at your home state’s plan first because it may offer a state tax deduction, credit for contribution, matching grants, and a variety of other state-specific benefits including fee-waivers or lower fees.

4. Ownership

A key feature of 529 plans is their ownership. They remain in the estate of the owner or parent (depending on if a successor was named). This means ownership never transfers to the beneficiary of the account. Also, if the beneficiary does not need any/all funds for college, the funds are able to be transferred to a family member without penalty at any time! When deciding on a plan you will also want to consider the following: the types of associated fees (e.g., opening fees, annual fees, servicing fees), the investment options available, and the service reputation of the plan (how easy is it to get ahold of someone should you need to make any changes?).

5. Gifting

Have the toys and gifts for your child, grandkids, nieces or nephews been piling up? Consider forgoing gifts for holidays and birthdays and encouraging families to contribute toward their education! Anyone can give to an existing Virginia 529 account (if they have the account owner’s gift I.D.) and there are several ways to do this. Often gifts consist of toys or clothes, but what about a gift for the future?

Ultimately, 529 plans allow tax-free earnings that grow over time; the longer it’s invested, the greater the opportunity for growth. If you have any additional questions, consider consulting your financial advisor. At Tull Financial Group, our advisors are educated and highly experienced in guiding you through 529 plans and options for your children, grandchildren, relatives, and friends. It’s always wonderful to be a part of the story. Setting my son up for success is my responsibility and I know our future selves with thank me!