May 29th (5/29) marks National 529 College Savings Plan Day, making this month a good opportunity to learn more about 529 plans and how they can help you save for college and other qualified education expenses.
Higher education costs are steadily rising. The College Board—a nonprofit educational association—reports that for 2018–2019, the average tuition, fees, room and board for a four-year private college is $48,510 per year, or $21,370 for a public in-state institution.1
The good news is that there are steps you can take today to ensure that you’re prepared to pay those expenses when the time comes. Understanding how to use a 529 plan can be a great starting point. Named after Section 529 of the Internal Revenue Code, a 529 plan is a tax-advantaged way to save, or even pay in advance, for college expenses.
Earnings in a 529 plan can be tax-deferred, with withdrawals being exempt from federal and state income taxes if you use the funds for qualified expenses such as tuition, fees, room and board, and supplies. Many states also offer state tax deductions or tax credits on top of that.
Another key benefit of 529 plans is their flexibility. Some investments that are used for education funding (such as a Coverdell ESA) require that the assets be distributed or transferred when the beneficiary reaches a certain age. With a 529 plan, the owner of the account continues to make all of the decisions. For example, if the beneficiary decides not to go to college, you can choose a different beneficiary or use the plan for your own education needs.
529 savings can also be used for any accredited in-state, out-of-state or international educational institution. A 529 has no age restrictions, meaning anyone can benefit from a 529 account.
Additionally, you can usually cover full college costs because the contribution limits per beneficiary generally exceed $200,000. Note that contribution limits vary by state.
Doing Even More with Your 529 Plan
The Tax Cuts and Jobs Act of 2017 permits Federal tax-free withdrawals from 529 plans of up to $10,000 per year, per student for expenses related to elementary or secondary public, private or religious school. However, note that the state tax treatment of K-12 withdrawals is under review by most states. Speak with a tax advisor before withdrawing 529 funds to use on K-12 schooling.
A Strategy to Achieve Your Goals
When it comes to setting up a 529 plan, there are a range of investment strategies to choose from, depending on such factors as the age of the intended beneficiary, financial objectives and risk tolerance. An experienced Financial Advisor who is familiar with your family’s individual circumstances can provide guidance on developing an approach to help achieve your education savings and other financial goals.
If education expenses are on your financial horizon, National 529 Day is a timely reminder to explore the benefits and tax advantages these plans can offer.
1 Source: Trends in College Pricing – The College Board
This article has been prepared for informational purposes only. The information and data in the article has been obtained from sources outside of Morgan Stanley. Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of the information or data from sources outside of Morgan Stanley. It does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this article may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investors should consider many factors before deciding which 529 plan is appropriate. Some of these factors include: the Plan’s investment options and the historical investment performance of these options, the Plan’s flexibility and features, the reputation and expertise of the Plan’s investment manager, Plan contribution limits and the federal and state tax benefits associated with an investment in the Plan. Some states, for example, offer favorable tax treatment and other benefits to their residents only if they invest in the state’s own Qualified Tuition Program. Investors should determine their home state’s tax treatment of 529 plans when considering whether to choose an in-state or out-of-state plan. Investors should consult with their tax or legal advisor before investing in any 529 Plan or contact their state tax division for more information.
Investors should review a Program Disclosure Statement, which contains more information on investment options, risk factors, fees and expenses and possible tax consequences. Investors can obtain a 529 Plan Program Disclosure from their Financial Advisor and should read it carefully before investing.
Investments are subject to market risk and may fluctuate in value. Before investing, investors should consider whether tax or other benefits are only available for investments in the investor’s home-state 529 college savings plan. 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.
© 2019 Morgan Stanley Smith Barney LLC. Member SIPC.
CRC 2396622 02/2019