As tuition costs continue to rise at double the rate of inflation, parents are thinking more and more about how to help children afford college. But surprisingly, surveys continue to reveal that many Americans have never heard of one of the best tools for education saving, the 529 plan.
This tax-favored account has been available for more than 20 years; it was established by Congress and is authorized by Section 529 of the Internal Revenue Code. According to SEC.gov,
“A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions . . . There are two types of 529 plans: pre-paid tuition plans and college savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a pre-paid tuition plan.”
Funds deposited in a 529 plan accumulate tax-free. Withdrawals are also not taxed, as long as the money withdrawn from the plan is used for “qualified educational expenses.”
Over the years, the plans have been tweaked by Congress; in 2015, for example, the law was changed to classify computer purchases as eligible expenses for which 529 funds could be used, as long as the computer is being bought for educational use.
Recently, legislation has been proposed in Congress that would further liberalize the uses to which funds from 529 plans may be put, including the repayment of student loans. The provision permitting plan assets to repay student debt would be especially welcome in the current environment, when college graduates are facing mounting student loan balances. The bill, H.R. 529, would also incentivize employers to offer payroll-deducted contributions for employees. Additionally, the new legislation would enhance plan owners’ ability to direct the investments within their plans. Currently, 529 plans can be rebalanced or reallocated only twice per calendar year. But H.R. 529, proposed in January by Rep. Lynn Jenkins (R-Kan.) and Rep. Ron Kind (D-Wis.), would allow plan owners to manage the assets in their plans much like owners of 401K plans do currently. Plan funds may be invested in mutual funds, money market instruments, and other types of investments.
Information on 529 plans is available through the U.S. Securities and Exchange Commission. Additionally, the College Savings Plan Network maintains a clearinghouse for state-sponsored plans and also works to promote legislation that makes 529 plans more widely available and user-friendly.
If you have questions regarding your 529 plan or 529 plans in general, contact us or your financial advisor.