Wealth Planning Insights
Education Funding with 529 Plans
Michael Pumphrey, AFC®, October 2023
In my experience providing financial counseling, I have fielded many questions with regards to the best ways to fund college education for a child or grandchild.
When it comes to selecting a vehicle for your education saving, there are a variety of options. However, often the best solution is a 529 plan. A 529 plan offers the benefit of tax-free growth and withdrawals for qualified education expenses.
A pre-paid in-state tuition plan is a specific type of 529 program. These plans have the most limited options for use and can have drawbacks if your student ends up not attending school or goes to an out-of-state school.
The 529 savings plan is the more flexible of the two accounts and can be used for a wider variety of costs, including associated expenses like room and board, and vocational apprenticeship programs. K-12 tuition expenses and student loan payments are also allowed up to $10,000.
Contribution limits are quite generous. In addition to an annual exclusion of $17,000 per person for 2023, one could also “superfund” a 529 plan by using up to 5 years' worth of annual gift exclusions in one year. This could add up to $170,000 combined between spouses.
There are a variety of 529 plan providers available which offer a range of investments options, a common choice being a target enrollment fund which begins with more growth oriented strategies and becomes more conservative over time as your student approaches starting school. This provides the real advantage of potential long-term appreciation of your savings above and beyond the rising costs of education.
If your student does not use all of the 529 funds for whatever reason, the beneficiary could be changed to another family member including even yourself.
As a last resort, non-qualified distributions can be made for needs other than education, like helping your student with a home down payment. These distributions would be subject to taxation on the growth in the account plus a 10% penalty. A distribution as a result of receiving a scholarship would be an exception to this.
At Tanglewood, we are pleased to answer any questions you may have about how best to fund education for your student. Please reach out to your Wealth Advisor to begin the conversation.