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Refresher Course on 529 College Savings Plans

By Roberta L Nestor

It’s hard to believe that 529 College Savings plans have been available for 25 years.  That longevity has led to multiple changes from the original IRS Code (which is what the 529 stands for).  With each year, these changes have lent themselves to be more and more favorable in making 529 plans one of the best options to prepare for college costs.  Apparently, families have already warmed up to these college savings plans.  According to a new report from Morningstar (published in May 2021), total 529 plan assets reached a record high of $384 billion.

Years ago, they had limitations for use.  Initially, 529 plans had to be used solely for tuition and/or room and board.  Today, they have expanded to include books, computer equipment and even international education.  You no longer need to limit yourself to a traditional four-year college as 529 plans now include community colleges, graduate school, trade schools, theological seminaries, and even online colleges.  This evolvement should eliminate parents who are concerned that their children won’t go to a traditional college for higher education.

In January of 2019, 529 plans also became available to use for private, public, or religious primary education.  Up to $10,000 per year can be withdrawn and used toward costs for high school, elementary or middle schools.  Another change in 2019 was to allow qualified distributions for repayment of qualified student loans.  So, if you have funds remaining in the 529 after college, you can apply up to $10,000 per year to pay off loans.  With the average student debt for a bachelor’s degree set at $28,950 (Saving for College, 2020 Study) a small amount of savings when your child is young could help them pay off student debt in just a few years instead of decades.

Generally, 529 Plans have three components.  First, there is the owner of the 529 plan.  Typically, the owner is the parent; however, grandparents, aunts, and uncles, any relative – even a friend – can be the owner and establish a 529 Plan.  The second component is the Successor Owner.  Should something happen to the primary owner, who would step in?  Lastly, there is the beneficiary of the 529 plan who would be the future student.  Regardless of who owns the plan, anyone can make contributions on behalf of the beneficiary.

What happens if you establish a 529 Plan, and the beneficiary does not attend any form of higher education?  There are a few options here.  The owner can always change the beneficiary on the account.  The new beneficiary can be any family member—sibling, the parents themselves, nieces, nephews, even first cousins can become the new beneficiary.  Some families look at a 529 Plan for generational college planning.  There is no age restriction to funding and utilizing the 529.

The worst-case scenario is if you cash in the 529 and it is not used for qualified educational expenses.  The owner of the plan would have to pay ordinary income taxes on any of the profit (not on principal) and, in addition, there would be a 10% penalty on those earnings.  There could potentially some state tax liability as well.

Flexibility is built into these plans.  You do not need a large up-front contribution.  With the CT CHET plan, you can invest as little as $15.  You can have automatic monthly contributions from your checking or savings accounts where you can start or stop anytime.  And when it comes time to paying the tuition bill, withdrawals can be made payable and sent directly to the college.

529 rules can be complex and often advice is needed when it comes to the best way to use the accumulated savings.  It’s important to understand, what, if any, impact a 529 Plan could have on financial aid.  There are already amended rules for 529 plans that go into effect in 2022 that are also favorable.  CT offers the flexibility of offering CHET through an advisor or direct (online, DIY style).  More information can be obtained at www.aboutchet.com.

Roberta L. Nestor is a financial advisor practicing at 759 Boston Post Road in Milford, CT offering retirement, long term care, investment, and tax planning services.  She offers securities and advisory services as a Registered Representative and Investment Adviser Representative of Commonwealth Financial Network – a member FINRA/SIPC and a Registered Investment Adviser.  Fixed insurance products offered through Nestor Financial Network are separate and unrelated to Commonwealth.  Commonwealth Financial Network or Nestor Financial Network does not provide legal or tax advice.  You should consult a legal or tax professional regarding your individual situation.  Roberta can be reached at Nestor Financial Network, 203-876-8066 or roberta@nestorfinancial.com.

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