Why Should You Consider a 529 Plan?

If you have a child in high school, chances are they are already thinking ahead to college. With a focus on the academic achievement, extracurricular involvement, athletics and additional activities necessary to help them get into the institution of their choice, an important question is often pushed aside: how will you pay for their education?

There are several ways to pay for the ever-increasing cost of a college education: 1) You can try paying out of pocket as the bills come in, but that would be prohibitive for most people; 2) You could wish that a wealthy relative will offer to pay, but unfortunately, that option can be hard to come by; 3) If your child is good at sports, you can hope they earn a scholarship for their talent, however, the odds of getting a full athletic scholarship are fairly slim, or 4) Your child could take out a loan, but keep in mind that they could be burdened with payments for a very long time to come.

If none of these methods sound appealing, or even possible, the good news is that there is better option: the 529 Plan. It requires some planning and the earlier you do this planning the better, but it can often mean the difference between financial peace of mind or a mountain of debt.

What is a 529 Plan?

Legally called the “Qualified Tuition Program” in Section 529 of the Internal Revenue Code, the 529 Plan (as it has come to be called) is a plan operated by a state or educational institution that allows you to save money for educational purposes while also offering highly desirable tax advantages. Created by Congress in 1996, the main advantage of a 529 Plan is that the earnings are not subject to federal tax and generally not subject to state tax, when used for the qualified education expenses of the designated beneficiary. And those earnings are also not taxed when they are withdrawn to pay for qualified education expenses.

What is a Qualified Education Expense?

Qualified higher education expenses are such things as tuition, fees, books, as well as room and board at an eligible education institution. As of 2018, qualified education expenses also include up to $10,000 in annual expenses for tuition in connection with enrollment or attendance at a public, private or religious elementary or secondary school.

Who Can Be a Beneficiary?

Anyone can set up a 529 Plan and name anyone as a beneficiary. The beneficiary can be a child, grandchild or really anyone you want to help – you can even set one up for yourself. Whoever purchases the 529 plan is the custodian and therefore controls the funds until they are withdrawn. If necessary, the beneficiary can be changed without tax consequences and you also have the option to roll funds from one child’s 529 Plan into another’s without penalty.

How Much Can I Contribute?

There are no income limitations on you as the contributor, or the beneficiary. There is also no limit on the number of plans you can set up. There are, however, contribution limits. Contributions cannot exceed the amount necessary to provide for the qualified education expenses of the beneficiary. There may also be gift tax consequences if your contributions (plus any other gifts) to a particular beneficiary exceed $15,000 a year. For special rules that apply to contributions to 529 plans, please refer to the instructions for Form 709, United States Gift Tax Return.

In the opinion of most financial professionals, 529 Plans provide the best option for funding higher education. Setting up this plan is an investment decision, which means both the benefits and drawbacks must be considered along with alternative ways of paying for college. As with all financial issues, consulting with a trusted tax professional or a financial planner is recommended.

Roger Ingwersen is the Founder and a Managing Partner and Senior Wealth Management Advisor at The Harvest Group. The Harvest Group provides college planning as part of our Harvest Wealth Management for Life program. 

Important Disclosure:

The Harvest Group Wealth Management, LLC is an SEC registered investment adviser principally located in Waltham, MA.  Information regarding our firm’s services can be found at www.myharvestgroup.com. A copy of our current written disclosure brochure discussing our advisory services and fees remains available upon request.


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