529 college savings plans: What to know and what has changed

Minimizing the financial impact from a college education

College Girl founder Jessica Brown on how to students can manage the high costs of a college education and the alternatives to college education.

Wednesday is national 529 College Savings Plan Day, which has been designated to celebrate and publicize the tax-advantaged method for saving up for the costs of education.

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Users can prepay or contribute to a 529 account where post-tax money will grow tax-free. Distributions are not subject to taxes at the federal level so long as they are used for approved expenses – which includes items like tuition, books, room and board and technology.

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Here are some things to know about the plans:

  • There are no income restrictions on individual contributors, but allocations worth more than $15,000 during the year could trigger the gift tax. There are maximum aggregate limits for some plans. In general, the plan's balance is not to exceed the expected costs of the beneficiary's qualified expenses. Contributions are not deductible.
  • Accounts are offered through states and also through brokers, while qualified education institutions can only offer a prepaid tuition type 529 plan.
  • The person who purchases the 529 plan is in control of the funds until their withdrawal.
  • As of 2018, people have been allowed to withdraw up to $10,000 in annual expenses for other costs associated with an elementary, private or religious school.
  • The Tax Cuts and Jobs Act also allowed for funds to be rolled over, in some cases, into an ABLE account, which is a tax-favored account to help families save and pay for disability-related expenses
  • Funds can also be rolled over to the account of another family member without penalty.
  • The plans have grown in popularity throughout recent years – up 4.7 percent in the first quarter to 13 million, according to data cited by The Wall Street Journal. Americans have nearly $216 billion stashed away in the savings accounts.
  • The average account size grew nearly 40 percent in real terms from 2010 to 2017, according to data from Pew Charitable Trusts, with the average account holding about $24,000 in assets.

A number of states on Wednesday are employing inventive ways to get residents to open an account as the country celebrates their potential advantages. In Vermont, for example, every baby born on May 29 will get $100 deposited in a state-sponsored 529 plan.

At a time when mounting student loan debt is burdening many Americans, the plans can be a way to limit how much families need to borrow for higher education. Outstanding student loan debt hit $1.46 trillion at the end of last year, according to data from the Federal Reserve Bank of New York, second only to mortgage debt as a share of Americans’ total debt burdens.

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Helping Americans save is becoming an important topic in national discourse. There is retirement reform legislation moving through Congress that could help increase overall retirement savings, at a time when the Federal Reserve Board found that only 61 percent of Americans could cover an unexpected $400 expense with little trouble. The bill would expand access to popular retirement plans, by incentivizing small businesses to provide them for employees. Lawmakers are also looking to make the accounts more flexible as people live longer.

A Senate version of the retirement bill would allow for the withdrawal of as much as $10,000 to help repay student loans. That provision, however, was not included in the House bill that passed the chamber last week, which will be taken up now by the Senate.