Effective 529 Planning Strategies
Blog Post Financial Planning
August 19, 2024

The excitement of back-to-school preparation comes with the sobering reality of the exorbitant cost of education.

The College Board found last year’s average for just one year of tuition, fees, and room and board at a four-year public school for out-of-state students was $46,730, while a private nonprofit four-year school cost $60,4201. Many families turn to 529 savings plans to address the spiraling cost of education. But to get the most out of these plans, we need to give them a closer look in today’s volatile market.

529 Tax Advantages

The tax advantage is one of the most compelling reasons to consider a 529 plan. Contributions grow tax-deferred, and withdrawals for qualified educational expenses are tax-free at the federal level. Many states also offer tax deductions or credits for contributions to a 529 plan. Recent changes have expanded the use of 529 funds beyond college expenses. Parents can now use these funds for K-12 tuition, apprenticeships, and even student loan repayments.

This flexibility allows for a broader range of educational expenses to be covered, making 529 plans more versatile than ever. The individual contribution limit for 2024 is $18,000, meaning a married couple can contribute up to $36,000 per year2. Additionally, many plans allow for lump-sum contributions using five years’ worth of gift tax exclusions, which can be a strategic move for estate planning. Moreover, funds in a 529 plan are considered parental assets and have a relatively low impact on financial aid eligibility compared to other savings vehicles.

Risks Of A 529

Still, there are potential drawbacks to keep in mind. Investing in a 529 plan involves market risk, as the funds are typically invested in mutual funds or other securities. In a volatile market, the value of the investments can fluctuate, potentially impacting the amount available when it’s time to pay for educational expenses. If the funds are not used for qualified educational expenses, withdrawals may be subject to income tax and a 10% penalty on the earnings.

How To Mitigate Risks Of A 529

One of the best strategies to mitigate risk is to simply start contributing as early as you can. Starting early allows your investments more time to grow and recover from market fluctuations. Consider diversifying your 529 investments to better manage risk. Many plans offer age-based portfolios that automatically adjust the asset allocation as the beneficiary gets closer to college age. Staying informed about legislative changes that could impact the benefits and uses of 529 plans is also important. The SECURE 2.0 Act, for example, introduced new provisions that can be advantageous for 529 account holders. The new rules allow a beneficiary of a 529 plan account to roll over some funds, tax and penalty-free, into a Roth IRA in their name.3

And while you concentrate on fueling your children’s education, don’t neglect your own financial future. It’s natural to want to help your children avoid debt. But there are many ways to finance college education, and fewer options for funding retirement. Put your financial security first so you won’t become a financial burden to your child later in life.

529 plans are a powerful tool for educational savings, but they should be considered as part of a broader financial strategy. By understanding their advantages and potential pitfalls, you can make informed decisions that support your child’s educational aspirations while planning for your financial future. Consulting a financial advisor can provide personalized advice based on your unique financial situation and goals. For more insights on 529 plans and other educational savings options, contact a Prime Capital Financial advisor today. Our team is dedicated to helping you navigate the complexities of financial planning and achieve your goals.

 

Sources

  1. The College Board, Trends in College Pricing 2023
  2. CNBC, 529 college savings plans ‘are better now than they’ve ever been,’ expert says. Here are key changes for 2024
  3. My529: Roth IRA Rollovers

This information does not constitute legal or tax advice. PCIA and its associates do not provide legal or tax advice. Individuals should consult with an attorney or professional specializing in the fields of legal, tax, or accounting regarding the applicability of this information for their situations. Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., Suite#150, Overland Park, KS 66211. PCIA doing business as Prime Capital Financial | Wealth | Retirement | Wellness.

Prime Capital Investment Advisors
Latest posts by Prime Capital Investment Advisors (see all)