What You Need to Know About 529 Plans
There is no better building block than the 529 educational savings plan for parents trying to save for their children’s future. This tax-free savings vehicle is a flexible, effective way to pool funds for a good education. They are offered by 50 states with each plan offering different features, so it is worth reviewing which plan best fits your circumstances.
Benefits of a 529 Plan
Tax Advantaged
Income Tax
Funds used to pay for qualified education expenses (like tuition, room and board, books, and more) can be invested, grown, and withdrawn tax-free.
A few states offer additonal tax benefits for contributing to a 529, check with your state’s department of education to learn more.
Estate Tax
Many get double duty from the 529 plan by also using it as an estate planning vehicle. Anyone can contribute up to $15,000 for 2021 and 2022 ($30,000 for married couples) on top of their state tax limitation to a child, grandchild, or any other beneficiary.
Advanced users turbo charge this advantage by “front loading” the plan with 1-5 years’ worth of exempt gifts or up to $75,000. Don’t forget that these are per benefactor figures, so a married couple could gift up to $150,000 per kid outside of their estate.
Transferable Savings for College and More
Many parents worry about what will happen to their 529 savings if their child doesn’t go to college. The good news is, you can change the beneficiary of a 529 plan as much as you need to. So, if your child doesn’t attend college or they don’t use all the funds in their 529, you can change the recipient to another child or grandchild. What many don’t know is you can use the 529 account to pay for your own education too!
In addition to college expenses, you can use up to $10,000/year of 529 funds for K-12 private school tuition.
529 assets can also be used at many international schools, trade schools, and apprenticeship programs in additonal to traditional paths such as an undergraduate, masters, or doctorate degree option.
Choosing Your 529 Plan
Did you know that you don’t have to stick with your state’s 529 plan? You can enroll in any state’s 529 plan regardless of which state you reside in!
We have reviewed each state’s 529 plan to determine which plan was the best for our clients. There are two major areas we looked at to narrow down which plan is right for clients: investments and cost.
Investments:
It’s well known that you can invest the funds in a 529 account but where many can go wrong is choosing the right asset allocation. Unlike a retirement savings account, most 529s are being invested for children who paradoxically have a high risk tolerance but a short time horizon. So, parents need to choose a well-diversified investment strategy that’s tailored to their child’s education needs.
Cost:
When evaluating plans, you’ll want to find the most cost-effective solution for your education savings needs. There are 3 type of fees you need to look at in 529 plans: The first is the administration fee, the institutions offering these plans usually charge a fee for your enrollment in the plan. The second is investment fees, most plans offer various investment options, and each option has an expense associated with it called the expense ratio. The last is advisor compensation, if you have an investment advisor managing your 529 plan, you’ll likely pay advisory fees.
Camelotta Advisors manages the 529 accounts for all our clients’ children as a part of our holistic financial planning and investment management approach. We are uniquely positioned to provide customized age-based investment strategies within our 529 plans, and we are consistently reviewing the available options to ensure our clients get the best products.
Get in touch with us today if you need help managing an existing 529 plan or you’d like to set one up!
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Camelotta Advisors is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Camelotta Advisors and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Camelotta Advisors unless a client service agreement is in place.