What is a 529?
According to the SEC, “A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as ‘qualified tuition plans,’ are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. There are two types of 529 plans: prepaid tuition plans and education savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan.”
Why should I invest in a 529?
It’s a way to save for your kids’ education with after-tax money that grows tax-free. You can use it for qualified educational expenses, including room and board if a non-prepaid plan, for any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the US Department of Education. You can also use it for tuition for elementary, middle, and high schools.
Who can invest in a 529?
Anyone can. If you don’t have kids, you can set up a 529 for a niece, nephew, brother, sister, etc. You can even designate yourself as the beneficiary.
When should I invest in a 529?
Many people start one after their first child is born. It’s actually possible to start one even before that — just name yourself as the beneficiary. However, you may not want to do this just in case you don’t end up having kids, since you can’t withdraw contributions penalty-free. The earnings portion, but not the contribution portion, of a non-qualified 529 plan distribution is subject to income tax and a 10% penalty. Depending on which state you’re in, you might face state tax penalties as well.
How can I invest in a 529?
The traditional way and probably best way to set up a 529 in order to preserve the possibility of some financial aid from the college is to title the 529 in the name of one of the parents. The beneficiary is the child who will attend college.
How much can I invest in a 529?
For the most part, you can put as much as you want into a 529. Total 529 plan contribution limits are set by the states. For example, the Nevada 529 College Savings Plan currently has a per beneficiary contribution limit of $370,000. This means that once your contribution amounts (not including earnings amounts) to the 529 plan have reached $370,000, you’ll have to be content to let it ride. (You can still contribute to a different 529 plan, though.)
Note that contributions to a 529 count as a gift from you to the beneficiary, even though the account is titled in your name and is still part of your estate. Thus, if you exceed annual gift limits, you will simply have to report it on your taxes. Also note that it is possible to superfund a 529, wherein you can contribute up to 5 years’ worth of the gift tax limit. In 2019, that means $150,000 for a married couple to each child. You’ll have to file a federal gift tax return form 709 with the appropriate election, and then your contribution will be treated as if you’d made a $15,000 gift for each of five years.
Which 529 should I choose?
If your state offers a state income tax deduction for investing in your state’s plan, you should probably start there. Unless the fees are incredibly onerous, the state income tax savings should offset the fees charged. Most states only allow up to a certain deduction amount per parent. For example, NY allows $5,000 for one parent and $10,000 if married filing jointly. MD allows $2,500 per beneficiary per parent per year. VA allows $4,000 per beneficiary per parent per account per year with an unlimited carryforward to future tax years (subject to certain restrictions). And, if you’re 70 or older, you can deduct the entire amount contributed to a Virginia529 account in one year. So, make sure to check your state 529’s details, because each state is different.
If you’re lucky enough to live in a state that grants a state tax deduction no matter where you contribute, or in a state that has no income tax (even better!), then look at Utah and Nevada’s 529 plans. These plans are consistently among the highest rated because they have Vanguard funds with low fees.
You may also want to consider putting some money into your state’s prepaid tuition plan and/or the Private College 529, which is a prepaid tuition plan for select private colleges.