They're tax friendly, flexible and available to anyone. Yet, 529 education savings plans are still underused. Here are five things that parents, grandparents and anyone hoping to get a leg up on college costs need to know.
How are some families planning for future education expenses? According to SallieMae’s How America Saves for College 2020 report, more than one-third of families used a college savings account like a 529 to pay for college. 1 A 529 plan can be used for more than just college savings. They’re tax-advantaged investment plans offering considerable benefits 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:
1. They Offer Considerable Income Tax Benefits to The Account Owner
529 plans offer federal and state tax-free compounding for as long as invested within the plan and there's never a required minimum distribution. Withdrawals for qualified educational expenses are federally tax-free and free of most states' income taxes. Further, most states offer various levels of income tax deductions or credits for contributions to one or more 529 plans to further encourage saving and investing. Check with your tax advisor to see what your state may offer.
2. They're More Flexible Than You Think
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.
Some states require a minimum initial investment – sometimes as low as $15 to start a 529 plan. Additionally, the lifetime account contribution limits are generous, ranging from $235,000 up to over $500,000 per beneficiary.2 The plans are state-sponsored, but you can participate in mostly any state's plan. However, you should first consider your home state’s plan as it may offer tax or other benefits exclusive to state residents.
Funds from a 529 plan may be used tax-free for most expenses 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.3 Additionally, you can now use up to $10,000 to repay qualified student loans and to cover certain costs for qualifying apprenticeship programs. Connect with your tax advisor to learn more about any state tax implications associated with covering these costs.
3. They Can Serve as An Estate Planning Tool
One of the great features of a 529 plan is that while you invest money for future education expenses, you also are reducing the size of your taxable estate. 529 plans are generally excluded from your taxable estate and thus not subject to estate taxes. It's important to note that you still control the assets and can access your money at any time.
Another important benefit of 529 plans is that they offer a way for grandparents and other family members to pass on assets to subsequent generations while enjoying certain tax advantages. With no withdrawal requirement, as owner with full control, you can designate who the account should be transferred to upon your passing and change such successor owner at any time, without any tax, cost, penalty or fee.
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. 4 Additionally, they can bundle five years of contributions into one $75,000 contribution ($150,000 for married couples), provided they make the required election on a gift tax return for the year of the contribution.5 Your Unified Lifetime Gift Credit is also available to fund your account up to the account maximum contribution limit at once.
4. They Have Minimal Impact on Financial Aid
The impact on financial aid is typically minimal for 529 savings plans. The short explanation: 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
Grandparents can contribute to a parent's plan. If they set up their own 529 account, they can pocket state deductions where available and retain control of the account. But going this route may affect financial aid.
5. Not All 529 Plans Are the Same Plan
Morgan Stanley offers a variety of 529 plan options to help you save while taking advantage of tax and estate planning benefits. The Morgan Stanley National Advisory 529 Plan offers fiduciary oversight of your education funding strategy within the context of your broader assets, portfolio and life goals.7 Additionally, other plans offered are backed by some of the nation’s leading mutual fund companies. Work with your Morgan Stanley Financial Advisor to learn more about which 529 plan option may work best for you.
Invest for the Future
When it comes to college costs, every dollar counts.
Speak with your Morgan Stanley Financial Advisor or Private Wealth Advisor to help you invest for future education expenses within the context of your overall wealth strategy.