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Are You Prepared for the Rising Cost of Higher Education?

We’re all juggling multiple financial goals. A 529 plan can help you accomplish several at once. 

While a college education is one of the most meaningful gifts a child can receive, the price tag can be overwhelming. It currently costs, on average, $188,000 for tuition, fees, room and board, for a four-year private college.1 Assuming a college-cost inflation rate of 3%, today’s 8-year-old child can expect to pay $265,000 for college in 2028.2 This could be why paying for a child’s or grandchild’s education is one of the most important long-term goals cited by investors in the Morgan Stanley Investor Pulse Poll.

Like saving toward any long-term goal, investing even small amounts each year can add up by the time a young child is ready to go to college. If you’re looking to set aside money for a child or grandchild’s education, a 529 plan offers you benefits and flexibility while helping you invest. The accounts, named after Section 529 of the Internal Revenue Code, are a tax-advantaged savings vehicle that allows you to save, or even pay in advance, education expenses. Earnings in a 529 plan can be tax deferred, and many states also offer state tax deductions or tax credits.

“We can all see how expensive college is getting. Because of that, many of my clients put saving for higher education for children or grandchildren at the top of their financial goals,” said Mary Deatherage, Managing Director and Private Wealth Advisor at Morgan Stanley. “A 529 plan offers great benefits while helping them reach that goal."

Beyond saving for college, a 529 plan can help you and your family members achieve other financial goals, including investing in a tax-favorable way and planning for how you will leave money to future generations.

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Flexibility and Control of Your Education Funds

Anyone can open or contribute to a 529 plan, and your beneficiary can be anyone you choose—a child, grandchild, niece or nephew, spouse or even yourself. Contribution limits are set by each state, but most top $200,000 a year. You can even use an account to cover your own school expenses.

As the account owner, you retain control over the assets in any 529 plan, and you can change the beneficiary at any time. You can also withdraw some or all the assets in the account for any reason, although the earnings portion of a nonqualified withdrawal is subject to ordinary income tax plus, in most cases, a 10% federal income tax penalty.

“Let’s say your child wins a scholarship,” says Deatherage. “You can transfer the money you’ve saved for her to a younger sibling, or nieces and nephews. We’ve even had parents use their children’s 529 plans to pursue higher degrees for themselves."

529 plans have become even more flexible. The Federal Tax Cuts and Jobs Act of 2017 expanded 529 plan benefits to include federal tax free qualified withdrawals from 529 plans of up to $10,000 per year per student to pay expenses for tuition, in connection with enrollment or attendance at an elementary or secondary public, private or religious school.  Note that state tax treatment of K-12 withdrawals is currently under review by many states. Speak with your tax advisor if you’re thinking of using 529 plan funds for grade school expenses.

Tax Benefits for College Savings

The money you invest in a 529 plan can compound tax free. That means your earnings can be used to grow your funds, rather than be siphoned off to pay taxes. Also, more than 30 states let you take a full or partial deduction or credit for these contributions on your state return.

When you take out money from your 529 plan account to pay for qualified expenses at virtually any accredited post-secondary school, your withdrawal, including investment earnings, will be federal income tax-free. Qualified expenses include tuition, fees, room and board, books or supplies such as a laptop or software.

Gifting to Family Members and Estate Planning

529 plan contributions are treated as gifts—up to $15,000 per beneficiary; $30,000 for couples filing jointly, so they may lower your tax liability.  You can also make an “accelerated gift” under gift tax rules. That allows you to use up to five years of annual gift tax exclusions in one year, or $75,000 per beneficiary, $150,000 for couples.4

“The gift tax rules make contributing to a 529 plan a great option for many of my clients who are grandparents,” said Deatherage.

Assets you hold in a 529 plan are not considered part of your taxable estate.


1 College Board,; $46,950 represents the average annual cost in 2017 of a private four-year institution for tuition, fees, room and board (~$188,000 across four years).

2 College Board, College Savings Calculator,; rounded from $263,974.

3 The Morgan Stanley Investor Pulse Poll surveyed more than 1,200 investors age 25 to 75 with over $100,000 in assets.

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