Five things you may not know about 529s (but should)

How are some families planning for future education expenses? According to Sallie Mae’s “How America Pays for College” 2023 report, families spent an average of $28,026 on college expenses and 30% of families used a college savings account like a 529 to pay for college.¹ However, a 529 plan can be used for more than just college savings. They’re tax-advantaged investment plans that can help families save for an array of educational costs.

For all their benefits, 529 plans are still often misunderstood and under-utilized. Here's what you may not know:

529 plans offer federal and state tax-free growth for as long as you’re invested within the plan—and there's never a required minimum distribution. Withdrawals for qualified educational expenses are federally tax-free and free of some states' income taxes. Further, some states offer various levels of income tax deductions or credits for contributions to one or more 529 plans to further encourage saving and investing.

The plans are state-sponsored, but you can participate in mostly any state's plan. However, consider your home state’s plan first as it may offer benefits exclusive to residents. Check with your tax advisor to see what your state may offer.

There are no income or age limitations, and any adult can open an account for any person's future educational expenses. Account owners may change beneficiaries for any reason at any time. You can even name yourself as a beneficiary.

Funds from a 529 plan may be used tax-free for college tuition as well as tuition at many kinds of post-secondary institutions, such as art or cooking institutes, community colleges, trade and vocational schools, and eligible international school expenses. You may even be able to use 529 funds for up to $10,000 in elementary and high school tuition annually.² Additionally, you can now use up to $10,000 to repay qualified student loans and cover certain costs for qualifying apprenticeship programs. Consult with your tax advisor to learn more about any state tax implications associated with covering these costs.

The lifetime account contribution limits are generous, ranging from $235,000 to over $500,000 per beneficiary.³ These are plan specific, so you should read the materials provided by your plan carefully.

Plus, 529 plans can serve as an estate planning tool. As of 2024, anyone can contribute up to $18,000 per year ($36,000 for married couples) to any individual’s 529 plan, without triggering the federal gift tax.⁴ Additionally, they can bundle five years of contributions into one $90,000 contribution ($180,000 for married couples), provided they make the required election on a gift tax return for the year of the contribution.⁵

Impact on financial aid calculation is generally minimal for 529 savings plans. As long as a parent is the account custodian, the child's financial aid will decrease by no more than 5.64% of the account value.⁶

Alternatively, grandparents may set up their own 529 account and, in some states, be entitled to income tax benefits while still retaining control over the assets in the account. These options impact financial aid consideration and the grandparent should consult their legal advisor when choosing an option.

With the costs of education trending higher each year, paying for college has become a major life expense that requires smart planning. A tax-advantaged strategy like a 529 plan is just one way to invest for the future.

The source of this article, Five Things You May Not Know About 529s (But Should), was originally published on June 21, 2022. The original content has been modified for E*TRADE from Morgan Stanley audiences.

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