Education Planning10 Myths About 529 College Savings Plans

Why is college so important?

 

College graduates versus noncollege graduates

1. Are generally healthier¹
2. Live longer²
3. Have more job opportunities
4. Make more money—67% more¹
5. Experience less unemployment¹

1 Education Pays 2016: The Benefits of Higher Education for Individuals and Society, CollegeBoard Advocacy & Policy Center.

2 “The effect of college education on mortality”, Brookings Institute, October, 2016

 

Who cares about being able to afford college?

 

The middle class is worried.

44% of families said they were overwhelmed when thinking about saving for college¹

69% of parents said it is extremely necessary for their child to receive²

1“How America Saves for College,” Sallie Mae, 2018. 2“College Hopes & Worries,” The Princeton Review, 2018.

 

 A 529 Savings Plan can only be used to save for an in-state school

 

FALSE!

529 savings plan money can be used in any state, for any qualified expense, such as

• College tuition and fees
• Room and board
• Books
• Computers and other supplies
• Required equipment
• Additional expenses of a special-needs beneficiary
• K through 12 tuition expenses of up to $10,000¹

Watch out for expenses that are not qualified:

• Insurance, sports, or club fees
• Transportation costs
• Repayment of student loans
• K through 12 nontuition expenses¹

1 Some states don’t consider withdrawals from a 529 plan to pay for primary or secondary school costs a permissible expense. The tax consequences of such payments will va ry depending on state law and may include penalties Please consult with a tax or legal advisor.

 

You’re better off sticking with your local state plan

 

TRUE & FALSE!

• Evaluate your state plan first
• Tax incentives are just one factor
  • Savings may be counteracted by poor performance or less attractive investment options
• Other important factors to consider:
  • Plan for performance over the long run
  • Investment options

 

529 plans can’t be used for adults

 

FALSE!

• While 529s can benefit youngsters, they can also be used by adults for postsecondary or graduate school.
• No age limits to a 529
  • Retirees can take classes with their grandkids!
• Unused money is easy to transfer to another beneficiary within the same family

 

529 plans are just for traditional four-year colleges

 

FALSE!

• Many junior and community colleges, vocational training programs, and postgraduate programs quality
• Use 529s at any educational institution that meets the specific federal accreditation standards
  • Most two-year and four-year colleges and universities
    • Can be used for undergraduate, graduate, and doctorate degrees and at vocational schools
• Tuition for grades K through 12¹

1 Some states don’t consider withdrawals from a 529 plan to pay for primary or secondary school costs a permissible expense. The tax consequences of such payments will va ry depending on state law and may include penalties Please consult with a tax or legal advisor.

 

529 accounts are difficult to open and maintain

 

FALSE!

• Professionally-sold plans offer the assistance of a financial professional
  • Help with allocations, setting goals, and investment selection
  • Investment options that are tailored to specific time horizons offer easy portfolio choices

 

High income earners can’t contribute to a 529

 

FALSE!

▪There are NO income limits on 529s

▪Everyone is eligible, no matter their income, deductions, tax brackets, or tax credits

▪Useful for estate planning

 

Consider maximum funding

 

Maximum contribution to a 529 college savings plan varies by plan

• Consider gifting the first $150,000 with the five-year accelerated gift¹
• Individuals can maximize the current $11,400,000 lifetime gift tax exemption²
• This maximizes the educational legacy for the beneficiary while still retaining the wait and see control

1Gift must be made by a married couple, filing jointly. The donors must elect that the gift be treated as having occurred over a 5-year period in order for it to qualify for the federal gift tax exclusion. If additional gifts are made to the same beneficiary during this 5-year period, a federal gift tax may apply. If the donor dies within this 5-year period, a pro rata share will be included in the donor’s estate for federal estate tax purposes. State gift and estate tax laws may vary. 2The amount is indexed annually for inflation.

 

Use 529 plans in trusts

 

Do you have a funded trust that provides educational support to your beneficiaries?

• Irrevocable trusts are subject to a very compressed income-tax bracket

• In 2019, trust income in excess of $12,750 is subject to a 37% tax

• Any earnings that accumulate in a 529 plan will grow tax deferred and, if used for educational purposes, are tax free

Source: irs.gov. State tax laws and treatment may vary. Earnings on nonqualified distributions will be subject to income tax and a 10% federal penalty tax. Please consult your tax advisor for more information.

 

The wait-and-see trust

 

Five-year front-loading

• Considered a completed, present interest gift
• Five years worth of gifting in one year
  • Allows up to $75,000 if single, $150,000 if married, filing jointly, to be gifted¹
• Gift is immediately removed from donor’s estate but can be accessed by the account holder if needed

1The donor must elect that the gift be treated as having occurred over a five-year period in order for it to qualify for the federal gift tax exclusion. If additional gifts are made to the same beneficiary during this five-year period, a federal gift tax may apply. If the donor dies within this five-yea r period, a pro rata share will be included in the donor’s estate for federal estate tax purposes. State gift and estate tax laws may vary.

 

You’ll lose your savings if your child doesn’t go to college

 

FALSE!

• Assets can be transferred―to yourself or to any family member of the beneficiary
• There is generally no tax or penalty on withdrawals from principal
• Distributions are taken pro rata
• Taxes (at ordinary income-tax rates) and a 10% penalty are applied to any earnings withdrawn that aren’t used for qualified educational expenses

 

Anyone can contribute to a 529

 

TRUE!

• Parents
• Grandparents
• Aunts
• Uncles
• Cousins
• Neighbors
• Strangers (if they wanted to)

 

Savings in a 529 plan dramatically reduce financial ability

 

FALSE!

Assets are considered the account holder’s; therefore, they may have much less of an impact on financial aid.

What’s a GREAT way to save for college? A 529 plan!

• Other college savings vehicles
• Coverdell ESAs
• Life insurance
• Annuities
• IRAs
• Roth IRAs

 

If your child wins a full scholarship, you’ll pay a penalty on withdrawals from 529 savings plan assets

 

MOSTLY FALSE!

• Savings can be transferred to another family member, or yourself, without penalty
• There is generally no tax or penalty on withdrawals from principal
• You can withdraw amounts equal to the amount of the scholarship without penalty (taxes may still apply to earnings)