Outside of planning for retirement and purchasing a home, educational expenses are among the most challenging financial events to plan for. Higher education plays a crucial role in both personal and professional development, often serving as a gateway to better career opportunities and financial stability.
Higher education expenses are daunting. Here’s why:
- The price tag is expensive (see average cost of today’s tuition below) and also includes books, room and board, transportation and other expenses.
- The runway for planning and saving is relatively short
- Expectations for cost inflation continues to grow at an increasingly rapid rate. Currently, tuition costs are growing at a rate of 6% per year.
For the 2023-24 school year, according to Collegeboard.org, the average published (sticker) tuition and fees for full-time students was as follows:
- Public four-year in-state: $11,260
- Public four-year out-of-state: $29,150
- Public two-year in-district: $3,990
- Private nonprofit four-year: $41,540
What is a 529?
Although UTMA (Uniform Transfers to Minors Act) and UGMA (Uniform Gifts to Minors Act) accounts provide benefits for saving for minors, 529 plans offer the best mix of advantages. 529 plans are a tax-qualified investment vehicle that provides benefits and caveats for educational savings. Unlocking the potential for future education expenses, 529 plans provide families with a strategic financial tool to invest in their loved ones’ academic journey.
Before 1996, prepaid tuition plans and other vehicles were popular college savings tools, however, the establishment of Section 529 of the Internal Revenue Code (IRC) created a whole new vehicle for investing in the future of education.
What are the benefits of investing in a 529?
529 Plans offer exceptional tax advantages such as tax-free withdrawals for qualified educational expenses. Contributions are considered “after-tax” and state tax deductible in many states. 529 plans are also low maintenance, have high contribution limits, and allow the flexibility of changing beneficiaries.
Is there any downside to a 529?
Despite offering many great benefits, there are no bulletproof investment vehicles that work for every financial situation. 529 Plans can only be used for educational expenses and all non-qualified withdrawals will be taxed and incur a 10% penalty. Although they may be used for private school education as well, only $10,000 may be used per year per student, which is limited to only being used for tuition. In addition, the investment options within the 529 plans are limited to each carrier, similar to a 401(k).
| PROS | CONS |
| Tax Advantages – tax-free withdrawals for educational expenses | Can only be used for educational expenses (and only tuition for private school) |
| Low maintenance & high contribution limits | Limited on Investment Options (similar to a 401k) |
| Flexibility of beneficiaries | Penalties for Non-Qualified Withdrawals |
How much should I save into my 529?
One of the hardest decisions investors planning to save for their children’s education face is determining the right amount to put away and save. Eighteen years may seem like a long time, but on a financial planning horizon, it is barely enough runway to reap many benefits from compounding growth. Therefore, the first advice when considering a 529 plan is to open one up as soon as possible and begin regular contributions. When determining the “perfect” amount to put into the plan each month, it is impossible to know the answer due to the many obstacles and variables that will occur before funds are utilized for educational expenses. However, another great benefit of the 529 plan is flexibility on the backend due to the vast options you have if you error on the side of caution and have more saved than needed.
Change Beneficiary
Although every 529 plan has a single beneficiary assigned when the account is opened, there is flexibility to change the beneficiary at any time without any penalties or tax consequences. That means that account owners can change the beneficiary to a different qualifying family member such as a younger child or a grandchild who may have educational expenses at a different time. There is no need to state a reason for the change and all it takes is submitting a change of beneficiary form.
Roth IRA Rollover
As of 2022, the Secure 2.0 Act created provisions for a rollover from a 529 Plan to the beneficiary’s Roth IRA penalty-free, however, there are several key limitations. Only $35,000 may be rolled over in a lifetime and the annual Roth IRA contribution limit of $6,500 still stands. It is also worth noting that the 529 Plan must have a minimum holding period of 15 years before this transfer can be made.
Graduate School and Student Loans
529 Plans can be utilized for both undergraduate and graduate degrees, as well as $10,000 annually towards private school education. They can also be used to pay off student loans at a maximum of $10,000 annually as well.
Next Gen
Another element to changing the plan beneficiary is that it can be passed down to the next generation. If you have money leftover in a 529 Plan and have exceeded all other rollover options, it can be passed down to children or grandchildren of the next generation.
If you have questions about education planning, please reach out to your Oakworth client advisor.
Oakworth Capital Bank does not provide tax or legal advice. All decisions regarding the tax and / or legal implications of these strategies should be discussed with your tax and / or legal advisors before being implemented.