A 529 Plan is tax-advantaged savings and investment plan for education expenses. One common misconception is that 529 plans can only be used for college education, however, it was expanded to cover K-12 education and apprenticeship programs in recent years. The investments within a 529 plan grow tax-deferred and can be withdrawn tax-free if used for qualified education expenses. That being said, a 529 plan can be a useful and versatile tool for tackling education expenses. Here are 3 important considerations you should know before determining if a 529 plan is right for you.
1. Advantages
As mentioned previously, one of the primary advantages of using a 529 is tax-deferred growth and potential tax-free withdrawals. Depending on the state you live in, another advantage may be tax deductible contributions. This means that contributions could potentially lower your taxable income and the amount of taxes you owe. Of course, this may work as an advantage or disadvantage depending on the state you live in. Other advantages include high contribution limits. Unlike other investment accounts, 529 plans have contribution limits ranging from $235,000 to $550,000 depending on your state. Another notable feature of the 529 is location flexibility. You are able to choose a 529 plan from outside of your state if you prefer to do so.
2. Disadvantages
While there are many advantages to the 529 plan, you should review the disadvantages before determining if it may be a good option for you. One potential drawback with a 529 is limited investment options. While an IRA or brokerage account has almost unlimited options, the 529 is more limited and includes several target-date funds that will become more conservative as the beneficiary gets closer to college age. Another disadvantage is that tax-free withdrawals can only be used on qualified education expenses. Qualified expenses include tuition and fees, housing, meal plans, books, student loans, computers, etc. Lastly, there are varying fees for 529 plans depending on the state you are from. While most fees are reasonable, some states may charge hundreds of dollars to open an account.
3. Transferability
529 plans have specific rules around transferability that are determined by the federal tax code. If you have additional funding in your 529 after education expenses are paid, you have the option to change the beneficiary to someone else in their immediate family. There are no penalties for changing beneficiaries, and you may make a change as often as needed. If the beneficiary you are shifting funds to already has a 529 in place, then you will complete a 529 rollover instead to consolidate the funds.
If you have any questions about 529 plans or anything related to education funding, feel free to reach out to us!
Samuel Shinn, MBA
Wealth Advisor & LPL Financial Planner
856-437-9294