CollegeWell

The Ins and Outs of Using a 529 Plan

By Jonathan Sparling

  • May 4, 2022
  • 4 min watch

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Ken Weingarten, CFP, co-founder of Weingarten Associates, knows about saving for college. As a financial planner, he advises many of his clients on college savings options and the importance of starting early. He’s also lived through it as a father of two daughters.

During our Learn from the Experts session, Ken shares valuable insights — and personal experiences — on using a 529 plan to save for college.

 

The basics

Ken breaks down the two types of 529 plans: savings (investment) and prepaid.

“I like to call it savings and an investment plan because you have to choose an investment,” says Ken. With this plan, you put money in and get a list — or menu — of investment choices, and you decide how your money is invested for a period of time.

With prepaid tuition, “You’re basically pre-purchasing your college tuition for your child,” says Ken. The primary advantage? No matter how much tuition goes up at a particular school, you lock in today’s rate for future use.

 

Two plans, maximum value

“When we started putting money into 529 plans a long time ago, we started with the traditional savings and investment plan,” says Ken — speaking from a father’s experience. “Then I started learning more about the Private College 529 Plan and this concept of pre-paying for a certain amount of time or a certain amount of tuition.”

For Ken and his family, moving some money from a traditional 529 plan into Private College 529 made sense to keep up with tuition inflation. From a planning perspective, it’s helped to diversify their college savings while keeping a well-rounded college savings portfolio.

 

Taxes, 529s and the advantages

For federal tax purposes, contributions are made with after tax dollars.

“The money grows tax-free within the plan, and if the money is used for qualified college educational expenses — tuition, room and board, mandatory fees, computer type of expenses — then you do not have to pay taxes at all on that distribution,” says Ken. Since prepaid plans only cover tuition and fees, this is where having both plans can be helpful.

When thinking about state income tax, there may be additional benefits. “Not all states offer a deduction, but a lot of states do,” says Ken.

Do your research and shop around. Start by researching your own state’s 529 plan to see if they offer a state income tax deduction (or credit) for contributions — plus any associated limitations with claiming deductions or credits.

 

Get grandparents on board

Involving grandparents in college savings is a smart idea.

“If you’re a grandparent, you can open the account and you’re the owner, and then you can name a grandchild as the beneficiary,” says Ken. Grandparents, like parents, maintain control of the 529. “You have the right to change who the beneficiary is on the account.”

Ken also shares another benefit of grandparent-owned accounts. “When a child fills out the FAFSA, which is the financial aid form for federal aid, you know they’re going to ask for information, income, and asset information. If there’s a grandparent-held 529 plan, you don’t have to report that as an asset,” says Ken.

A word of caution. Although 529 funds held by grandparents are not reported on the FAFSA, you will have to report any funds paid to the student from that account in subsequent years, which may impact financial aid eligibility.

 

From saving to spending

“If you only have one child, and once you know when they’re going to school, then you can start making some decisions,” says Ken. “[Like] okay, I kind of know what the expenses are going to be. I know what I got in the 529 accounts, and then I know what else I need to bring to the table.”

With multiple children, it’s best to think more strategically and consider how much you’ve saved for both children, the type of savings (traditional vs. prepaid), and what your cash flow looks like.

 

Find your right speed

Any investment plan carries a certain degree of volatility. For Ken, it comes down to a person’s risk tolerance.

Many 529 savings (investment) plans offer portfolio options that automate the reallocation of funds more conservatively as the child ages. Ken looks at this favorably.

“I think those age-based portfolios are great because you really don’t have to think too hard about them,” says Ken. “You can kind of forget about the news and volatility and hopefully sleep well at night.”

On the other hand, Ken sees a big differentiator.

“[With 529 prepaids,] you kind of take all that volatility out of the mix,” says Ken. “You’re basically just saying I want to pay for a certain amount of tuition, and then whatever inflation is, I know I have a certain guarantee with regards to future tuition.”

 

Just get started

“First, it’s never too late to start. And number two, if you’re able to start when your child or grandchild is young, that’s much better,” says Ken. Any amount you save is less you’ll need to finance, or take out of pocket, when your child enrolls in college.

Also, try and be systematic with your savings. Ken advises families to figure out how much you can put towards savings each month and then automate it. Also, try to avoid getting bogged down with the cost of college and saving for it all. Start somewhere, no matter what the dollar amount is.

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