529 Plans: A Powerful Tool to Save for Education

Feb 2, 2024

Though education costs continue to climb, starting to save and invest early can make a difference.

Key Takeaways

  • Rising education costs have made paying for it a greater challenge, but investing in a 529 Plan can help.
  • Investments in 529 Plans grow tax-deferred, and some states also offer deductions or credits for such contributions.
  • You can annually contribute certain unused 529 Plan funds into a Roth IRA without triggering a tax bill.

Of all the things that keep parents awake at night, looming college costs may be among the most daunting. For the 2023-2024 school year, the costs for a four-year private college averaged $55,470 per year for tuition, fees, room and board, books and supplies, transportation, and other expenses.1 That amounts to more than $200,000 to cover a four-year degree. And that’s for just one child.

 

With costs so high, many students and parents are taking on significant student loan debt to pay for college. More than half of those who graduated college in 2022 did so with loans, with an average debt burden of $29,400.2

 

If you’re on track with your retirement savings, starting the process of saving for the education costs of a child or grandchild early can help limit how much your future student will have to borrow. Consider putting those funds into a 529 education plan, a tax-advantaged way to invest now toward future education expenses.

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What is a 529 Plan and Why Consider One?

Named after Section 529 of the Internal Revenue Code, a 529 Plan is a tax-advantaged vehicle you can use to invest for future education expenses. A 529 Plan creates an incentive for families to invest toward education costs because earnings in the plan are tax-deferred, with withdrawals being exempt from federal and, in most cases, state income taxes if you use the funds for qualified expenses, such as tuition, fees, room and board, and supplies. Many states provide additional benefits, such as state tax deductions or tax credits. Additionally, assets in a 529 Plan remain outside of the account owner’s estate for estate-tax purposes.

 

A 529 Plan can also offer flexibility. Some investments used for education funding require you to give the assets to the beneficiary when they reach a certain age. If you open a 529 Plan, as the owner of the account, you continue to make all of the decisions and retain control over the assets. For example, if your daughter earns a scholarship and won’t fully drawdown the money in the account, you can choose a different beneficiary within the same family, or even use the funds for your own education needs.

 

You may also be able to use proceeds to pay down student loans or to contribute up to $35,000 in unused funds into a Roth IRA account for the designated beneficiary. 

 

In addition to college costs, up to $10,000 per beneficiary per year can be withdrawn federally tax-free to pay for eligible K-12 tuition. State tax treatment varies. 3

Many of our clients are grandparents looking to put themselves in a position to allow them to help with their grandchildren’s future education expenses.
Executive Director, Morgan Stanley Wealth Management Investment Solutions and Co-Head of Product Development for Traditional Investment Products.

Igniting a Movement to Save for Education

Still, many are unaware of 529 Plans and their expanding benefits. Fewer than a third of parents are currently using a 529 Plan to save for their children’s education. Many people want to save and invest for college, but don’t know where to start, says Jennifer Tierney, Executive Director, Morgan Stanley Wealth Management Investment Solutions and Co-Head of Product Development for Traditional Investment Products.

 

“Many of our clients are grandparents looking to put themselves in a position to allow them to help with their grandchildren’s future education expenses,” Tierney says. “We encourage them to take a look at 529 Plans, which may not have been on their radar the last time they were looking at how to pay for college.”

529 Contribution Limits Are Considered Gifts for Tax Purposes

In 2024, annual contributions to each 529 account of up to $18,000, or $36,000 for couples filing jointly, are treated as gifts and qualify for the annual per-beneficiary gift tax exclusion.4 Additionally, 529 Plans employ a special rule: An upfront contribution in one year of up to $90,000 for single filers, or $180,000 for married couples filing jointly—the equivalent of five years' contributions—may be made without any gift tax consequences.5

Investing Early for Future Education Costs

When it comes to investing in a 529 Plan, typically the earlier you can start putting money away, the better to allow for more tax-free compounding.

 

Still, it’s never too late to start saving and investing for college. Money set aside as late as when a child is 16 will still have several years to grow, assuming you use those funds to pay for the latter years of undergraduate expenses, or even graduate school. Funding can continue while student is in school, and beyond, as well.

 

Your Financial Advisor can help you choose a 529 Plan and the investment option therein best for you as part of your wealth strategy. They can also offer valuable guidance as it relates to any tax changes and during times of market volatility.

 

“A Financial Advisor can help you project what your education costs could be, provide guidance on selecting a 529 Plan, recommend an asset allocation and tailor your contribution schedule based on your needs,” says Marc Dextraze, Managing Director, Morgan Stanley Wealth Management Investment Solutions, and Head of Traditional Investment Products.

 

A 529 Plan is a convenient, flexible and tax-advantaged way to invest for a child's future education expenses. Morgan Stanley offers a robust platform of investment options, including the Morgan Stanley National Advisory 529 Plan, a first-of-its-kind advisory 529 Plan that enables you to benefit from fiduciary oversight of your education funding strategy within the context of your broader portfolio and life goals. If you have questions or need more information about 529 Plans available through Morgan Stanley, contact your Financial Advisor or Private Wealth Advisor today.

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