5 Big Misconceptions about 529 College Savings Plan

  • There’s the misconception that parents need a lot of money to open an account or that it’s too late to save. It’s never too late to save because anything that you can save on your child’s behalf reduces potential loans that he has to take out. It gives him a financial foot up that ultimately is going to impact what he’s going to be able to do once he gets a job in regards to paying back student loans, funding his first home, or funding his retirement account.
  • That it’s a complicated savings vehicle
  • You have to go to a university in the state where the plan was opened.
  • Accumulating assets in a 529 plan will lead to the detriment of the child when they apply for financial aid.
  • 529 assets are typically counted as assets of the parent. So people worry that if they save, their child won’t be able to receive financial aid, not understanding that that financial aid is given in the form of loans and sometimes grants.

What is a 529 College Savings Plan

A 529 plan (named after a section of the tax code) is a powerful way to shelter investment income from tax.

It works like a Roth retirement account: There’s no deduction on your federal income tax return for the money you put in, but any money coming out is free of income tax.

So a 529 account is way better than most tax shelters (like variable annuities), which merely defer tax.

Say you put $10,000 in now, then withdraw the money five years later when it has grown to $13,000. The $3,000 gain is exempt from state and federal income tax, provided the entire $13,000 is used for higher education.

What are the estate tax benefits of a 529?

Money you contribute to a 529 account is generally treated as a completed gift to your beneficiary, but as the account owner, you’ll still have control over it. If you die with money remaining in your account, it won’t be included in your estate for federal estate tax purposes.

However, if you took advantage of the option to treat a single $75,000 contribution ($150,000 for married couples) to a 529 plan account as if it was made over five years, and you die within five years of contributing, a prorated portion of the contribution will be subject to estate tax. 

Can money from a 529 be used at private and state universities?

529s are incredibly flexible.

So you can contribute to the plan and use those funds at any school, community college, four-year university, state institution, private institution, out-of-state institution, and even some colleges and universities abroad.

It can also be used for trade schools and technical schools. So any accredited institution, anywhere in the U.S., and some abroad. 

Best way to compare 529 plans from different states

The first thing to do is take a look at your own state’s 529 plans to see if there are any applicable state tax benefits that you could reap by having your plan in that state.

The second thing to look at is the cost of the plans. Like mutual funds, 529 plans have expense ratios.

You can compare the costs across different securities by looking at the expense ratios. The other thing to look at is the investment lineup.

Some 529 plans feature a mix of both passive and active investment options—index funds versus active mutual funds.

How can I open a 529 College Plan

Most plans are very good, and you can always transfer to another plan if you don’t like the one you’re in at any time. It’s more important to just open a plan and start saving as soon as possible, giving your money more time to grow!

To learn more about 529 plans, contact a financial advisor at Mintco Financial and get all the information on how to enroll.

Call us at 716-565-1300 or 813-964-7100

Email us info@mintcofinancial.com