Getting Started with 529 Plans

As a new school year starts for kids around the country, whether it is moving up to the next level in daycare, the first day of kindergarten, going into high school, or starting a semester abroad in college, the question of how best to fund education is top of mind for parents and family members.

They may have questions like:

• When do I start saving if I don't want to overfund?
• Which option should I use to save?
• How do I save for multiple children?
• What if my kids don't use all the funds?

The potential scenarios are endless when you are trying to plan for something in the future and have no idea how things will actually play out. Even though the specifics around your family member or loved one's situation are not absolute, having a plan for educational savings is recommended. In addition, we believe there is enough flexibility with some of these options that you can reevaluate when the educational road takes a detour — without negative financial implications.

Although there are several ways in which people can save for education expenses, the most common option is a 529 plan. There are two types of 529 plans: The Prepaid Tuition plan allows you to prepay tuition at today's rates, and the College Saving Plan enables you to save for education (growth tax-deferred). Though the Prepaid Tuition plan can be a good fit for some, most of our clients fund education through College Saving Plans. The College Saving plan has more flexibility around qualified college expenses and options should the account be overfunded.

529 plans are state-sponsored plans, and most states offer at least one. Though you are not limited to selecting a plan in the state where you reside, the state tax implications vary for 529 plan contributions and qualified withdrawals among states. Before deciding on a 529 plan, consider:  

• Tax Implications for Contributions: There is no tax benefit at the federal level for contributions to a 529 plan. You may be eligible for benefits at the state level. Some states offer a tax deduction for contributions up to a specified amount for a state-sponsored 529 plan, while others provide a deduction for contributions to any state's 529 plan. Evaluating your state's rules around 529 plan contributions can be beneficial.
• Tax Implications for Withdrawals: Consider how you plan to use the 529 plan, understand what are considered qualified expenses on the federal level, and remember these expenses are not always treated as qualified expenses for state purposes. Not all states have adopted K-12 education as a qualified expense. You can still pay K-12 education expenses out of a 529 if you live in a state that does not consider it a qualified expense, but you will likely be subject to state-level tax consequences.
• Funding Goals: There are no contribution limits for 529 plans, just maximum account balances when contributions are no longer permitted. The typical maximum value is $500,000; however, Georgia and Mississippi have the lowest maximum at $235,000. Depending on your funding goal, you might choose a state plan with a higher maximum.
• All state 529 plans are not created equal. Understanding the benefits or lack thereof in your state is vital before choosing a plan. Consider the fees, investment options, ease of use (online and mobile access), and other services when deciding on the specific plan.

As with most financial planning, as legislation is updated at the federal and state levels, these considerations for educational funding will evolve. Please continue to work with your relationship management team to implement and evaluate your educational funding goals.