Morgan Stanley
  • Wealth Management
  • Aug 19, 2021

9 Tips to Help Your 529 Plan

Explore these tips to help you to better understand what a 529 savings plan is, how it can help lessen a financial burden and potentially benefit you and your children.

An education is one of the most rewarding experiences a person can have in their lifetime, but it can also be one of the most expensive: 2/3 of US parents with college bound students worry about funding their children's education1—which is where 529 plans can come into play.

Having a 529 plan can help lessen a financial burden and make you feel more prepared for the future. Here are nine tips to help you better understand what a 529 savings plan is and how it can benefit you and your children.

1. How a 529 plan works

 A 529 is a tax advantaged investment plan that can help you pay for your family’s future education expenses.  These plans offer tax-free growth, potential estate tax benefits, and a high degree of control.    

2. Research the right 529 provider

This is often the biggest challenge for people who want to invest for future education costs. With multiple options available, it can be hard to narrow your choices. There are many factors to consider, and it’s important to figure out what works best for you and your family. Search online for reputable sites that compare costs and investment options across plans2.

3. Use your 529 plan on qualified expenses

A 529 plan can be used for a variety of qualified education expenses, including tuition, room and board, books and supplies. In addition, 529s can help pay for private K-12 education, graduate school, semesters abroad, apprenticeship programs and even student loans. Many students obtain degrees from two-year institutions, such as trade or vocational schools. For example, attending a culinary school or electrician program may be funded by a 529 plan.3 While qualified expenses can be broad, it’s important to check with your 529 Plan and understand which expenses are not qualified for 529 plan use. 

4. Take advantage of the state tax benefits offered in over 30 states

Many states offer state income tax deductions or credits for contributions to a 529 plan. The amount will depend on where you live. In many cases, you’ll have to pay into your state’s 529 plan to qualify for a state income tax benefit. Find out here if you live in a state that offers this benefit. 

5. Learn about related employee benefits

The benefits world has seen a shift as more people graduate college with debt. The class of 2020 graduated with an average of $36,140 in student debt.4

With staggering numbers like these, it’s understandable that many parents would want to invest for college with a 529 plan. Some employers offer solutions to help their employees plan for education. An example of this is Gradifi by E*TRADE’s College Save Up program, where employers can ease the burden of saving for education by directly contributing to an employee’s 529 plan.

6. Develop a strategy with your family

Sending your children to college can be a complex task. The cost of tuition is rising at twice the inflation rate.5 Educating yourself and your family on how to best plan for education expenses is one of the most important things you can do, and a 529 plan may be a solution to consider. Having an open dialogue about education costs with your loved ones is also important. Make financial literacy a family affair and help your children understand how financial planning supports their education, dreams, and future plans.

7. Contributions to a 529 plan can come from others

The great news is that anyone can contribute to a 529 plan regardless of who owns the account. This means parents, grandparents, aunts, uncles, friends, or other relatives are eligible to help you save for education costs.

One thing to keep in mind is the gift tax that can be assessed on large contributions. Anyone, including grandparents, can contribute up to $15,000 per year ($30,000 for married couples) to any individual’s 529 plan, without triggering the gift tax.

8. You can change beneficiaries

Maybe your child decides they don’t want to attend college. You can change the beneficiary to another qualified family member, including for example, a sibling, niece, nephew, or even yourself. 

9. You can contribute automatically – here are the limits

Setting up automatic contributions ensures that you save, easily and efficiently. The maximum account contribution limits are generous, ranging from $235,000 up to over $500,000 per beneficiary.3  

1 Saving for College, Survey Says Parents Are More Worried about Paying for College, June 2020

2 Saving for College, Compare 529 Plans, 2021. Maximum contribution limit varies by state.

3 US News and World Report, Qualified Expenses You Can Pay for With a 529 Plan, November 2019

4 EducationData.org, Average Student Loan Debt by Year, July 2021

5 Forbes, College Tuition Is Rising at Twice the Inflation Rate, August 2020

If an account owner or the beneficiary resides in or pays income taxes to a state that offers its own 529 college savings or pre-paid tuition plan (an “In-State Plan”), that state may offer state or local tax benefits. These tax benefits may include deductible contributions, deferral of taxes on earnings and/or tax-free withdrawals.  In addition, some states waive or discount fees or offer other benefits for state residents or taxpayers who participate in the In-State Plan.  An account owner may be denied any or all state or local tax benefits or expense reductions by investing in another state’s plan (an “Out-of-State Plan”).  In addition, an account owner’s state or locality may seek to recover the value of tax benefits (by assessing income or penalty taxes) should an account owner rollover or transfer assets from an In-State Plan to an Out-of-State Plan.  While state and local tax consequences and plan expenses are not the only factors to consider when investing in a 529 Plan, they are important to an account owner’s investment return and should be taken into account when selecting a 529 plan.

Tax laws are complex and are subject to change.  This information is based upon current tax rules in effect at the time this was written.  Morgan Stanley Smith Barney LLC and its Financial Advisors do not provide tax or legal advice.  Individuals should always check with their tax or legal advisor before engaging in any transaction involving 529 Plans, Education Savings Accounts and other tax-advantaged investments.

Investments in a 529 Plan are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so an individual may lose money.  Investors should review a Program Disclosure Statement, which contains more information on investment options, risks factors, fees and expenses and possible tax consequences.  Investors should read the Program Disclosure Statement carefully before investing.

Earnings on non-qualified distributions will be subject to income tax and a 10% federal income tax penalty   State taxes may be applicable.  Before investing, consider whether tax or other benefits or investments are only available in your home state 529 college savings plan.

Any type of continuous or periodic investment plan does not assure a profit and does not protect against loss in declining markets.  Since such a plan involves continuous investment in securities regardless of fluctuating price levels of such securities, the investor should consider his/her financial ability to continue his/her purchases through periods of low price levels.

Morgan Stanley Smith Barney LLC is not implying an affiliation, sponsorship, endorsement with/of the third party or that any monitoring is being done by Morgan Stanley Smith Barney LLC (“Morgan Stanley”) of any information contained within the website.  Morgan Stanley is not responsible for the information contained on the third party website or the use of or inability to use such site.  Nor do we guarantee their accuracy or completeness.

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