Happy 5/29 Day! Do you have any of these questions about 529 accounts?

I'm often asked about the value of 529s, whether I have one, can there be more than one, what if the child doesn't make it through college what happens to the money, and more questions. If you have some of the same types of questions - today's blog is meant for you.

I typically hold a call-in Club session to talk about saving for college right around May 29th in recognition of 5/29 Day, a day the country dubbed National College Savings Day, a day to raise American families' literacy about strategies for saving for and affording the rising cost of a college education. This year I just couldn't do it, been on the go and busy with my own high school junior and senior's year-end school activities and graduation. But here's a little consolation... hope you enjoy my blog. If you do, please let me know! If you find typos or inaccuracies, let me know that too! Thanks, Club Friends!

These are some of the questions I often get from The Money Matters Club goers or just those I counsel in my community in other capacities.

What other questions do you have beyond these that follow?

What is a 529?

It's a tax-advantaged financial account that gets its name from the section of the U.S. Tax Code it was first created in, or the section that first established these types of education savings accounts. They're typically opened by a parent, grandparent, or any benefactor who wants to save money for a lucky student (if not themselves) on a tax-advantaged basis--meaning the government doesn't tax these savings as much because the government wants to incentivize students to attend college. Making it more affordable by paying less tax on the dollars you grow in these accounts, makes it more attractive or at least a bit easier to pay for college.

How many 529s can I open? Or how many can one kid have?

There's no limit on the number of 529s you can open and save in and there's no limit on the number of accounts to which one student may be named as beneficiary. My children have at least two each that I know about. I opened one for each of my children and their Grammy opened one too for each. I suppose they'd let you, but it really wouldn't make much sense for you to open more than one for one kid. Keep it as simple as you can, in my opinion.

How much money can you put into a 529?

A lot. But don't put in more than it ends up costing the student to attend their chosen college. The money you save in a 529 has to be withdrawn for qualified expenditures related to attending college (think about the laptop, books, equipment, tuition, and campus parking--room and board may qualify too under specific terms). And while you can put lots into the account up front, you will want to pay attention that the annual gift tax exemption threshold amount published by the U.S. Internal Revenue Service (IRS) isn't exceeded. Because if you exceed it, you'll have to record the gift on your tax return to count toward the lifetime gift tax exemption amount. Right now, that threshold is set to allow giving $13.61 million in gifts per person before a gift tax would be assessed. On an annual basis you individually (each parent for example) can give a single person (each child for example) an $18,000 USD gift before you have to report the gift for taxation recording purposes. Give more than that and you have to start to debit from your lifetime gift giving threshold. However, if the gift is given by way of a 529 deposit, you can superfund that account in a given year at a rate of 5 years times any amount up to the annual gift amount before you impact your lifetime threshold--so for 2024 that can be a $90,000 gift from one parent or $180,000 gift to one child from both parents filing their own IRS Form 709. These rules are complex. And the recipient of your gift pays no tax. You (the gift giver) have tax to pay if you gift too much in one year or over a lifetime. Be sure to carefully consider the math and the ever-changing tax rules, in context with all the other gifts you're giving outside the 529 too.

Are Coverdells better than 529s?

Okay, so this isn't a question I'm often asked. At least not until after I've shined a light on the little-known Coverdell accounts. But it should be; Coverdells are just another type of Education Savings Account, or ESA for short. They're great and in my opinion, dollar for dollar, the first $2,000 anyone's going to spend saving for college for a child, are going to be best saved in a Coverdell; they're just a bit more powerful than 529s (if you are eligible to save in one, and if you make too much money to save in one directly there's ways around the gross income limit factor, like contributing through a trust or corporation for example). They're usable on primary education too, like private K-12 tuition and expenses. They're also thought of as more flexible in how they can be invested along the way and ultimately spent. However, unlike 529 money, the Coverdell money must be spent by the time the beneficiary has their 30th birthday. You can save in both a Coverdell and a 529. If you have more than $2,000 to save annually per child, I'd say find a way to get the first $2,000 into a Coverdell, invest it well, and then every other dollar you can save after that should go into a 529. Coverdells allow a beneficiary $2,000 a year to be saved in their name in total. It's not that you are allowed to save $2,000 and anyone else can put in $2,000 of their own too that year. The total saved each year in a Coverdell can't be more than $2,000--I'm not sure why this is never inflation adjusted, but just be sure to coordinate savings with all the benefactors you have loving on your child to not exceed the annual Coverdell threshold. Direct all excess contributions to the 529.

Do 529 funds hurt my child's financial aid prospects?

Not as much as you'd think. In my opinion, the funds you host on behalf of your child do not hurt their eligibility for aid as much as them having/owning/opening up their own 529 account and naming themselves the beneficiary--that dings them more so on what contribution is expected from the family. Your home equity and your retirement accounts don't ding/hurt your prospects at all. Income, liquid investments, and other non-retirement assets you own are counted against the student's eligibility for free aid, but at a rate lower than the student's own income and assets will be counted. Grandparent-owned 529s aren't reported at all on the FAFSA--not the balances and now none of the distributions from grandma's 529 for her grandchild's college costs are to be counted against the student's eligibility for aid. In other words, when grandma takes distributions from her 529 account to help pay a grandchild's tuition, the distribution won't count against the student as a received gift or as untaxed student income anymore, thanks to another recent change by the current Administration.

What if I save all this money and then my child doesn't even attend college?

This scenario is pretty low risk and here's why:

• If you're reading this, chances are you've got a child bound for greater heights than minimum wage jobs after high school. That could mean vocational jobs, jobs in the trades, jobs in corporations or academia. These jobs will all require some form of higher education be paid for at some point.

• Even if high school is the last stop, Coverdells can still be used for private primary education too. If you're paying tuition at the K-12 level, why not use money that's been grown/compounding tax-free?

• Your student doesn't have to just go to a four-year academic college. They can go to any accredited trade/vocational school too as long as that school is recognized by the U.S. Department of Education. A 529 has no age limit, the money will be useable even if they take a gap year(s).

• If your student never uses the money, rules allow for you to transfer the money to new/other eligible beneficiaries who will use the money in a qualified way--even your child's future children.

• If your student doesn't use up their 529 money, the current Administration made it possible through the SECURE 2.0 Act to roll up to $35,000 out of a 529 and into the student's Roth Individual Retirement Account (IRA) instead of withdrawing it taxably plus a 10% penalty. The money can't roll all at once, you have to roll annually up to the annual contribution limit set by the IRS and the Roth IRA has to be open for 15 years first before it can receive a 529 rollover. Additionally, the prior five years' worth of contributions to a Roth IRA can't count toward your lifetime 529 rollover amount. These rules are subject to changes so always research them well before assuming what you read once in an old article still stands.

• The worst case you could still liquidate the account and bite the bullet on paying tax on its growth as well as a 10% penalty. But don't do that! Money Matters!

Do I have to open my own state's 529?

Nope. You can open up any 529 from any state even if you don't reside in it. And shopping around for 529 deals can be kind of worthwhile. You can search for any tools that help you compare plans. This one at savingforcollege.com seems useful, for example, check it out here: Compare 529 Plans - Saving for College.

What can I invest my ESA balance(s) in?

Unlike Coverdells, which operate more like brokerages allowing many more investment opportunities, the 529s tend to offer only a limited line-up of pre-selected funds you can choose from, especially the typical range of Target Date (or 'glidepath') Funds that aim to become less aggressive (less exposed to too much downside risk) by the year your child heads off to college. 529s may also limit how often you can move in and out of these funds, like maybe they allow you to change your investment election just once or twice per year. So, plan ahead. In my opinion, it's easy to be too conservative too soon and for too long with these. But everyone is different and operate at different risk tolerance levels. I like to be aggressive as long as possible with at least a portion of the balance that won't be distributed for the longest time horizon (i.e., the funds we'll use after the last year of college expenses, or if you know there will be a portion that ends up rolled to a Roth IRA ultimately or transferred to a much younger beneficiary years from now). Plan when you will be taking out each portion of your 529 funds and understand the deadline to withdraw those funds for certain expenses. You can leave 529 funds to grow indefinitely, but experts tend to agree IRS guidelines inform you to distribute the funds you need to pay for qualified expenses in the very same tax year you incur them if you want to be reimbursed for them from the 529 without penalty. This is unlike--say for example--how a Health Savings Account works, where you can reimburse yourself indefinitely for qualified HSA expenses incurred even many years earlier.

Are there incentives or matches when opening 529s?

This is another question you should be asking but is often overlooked. The answer is sometimes, depends. It is worth researching which state plans offer incentive bonuses or matches for opening a 529. For example, in California, the ScholarShare 529 Plan offers $50 to those opening 529s by May 31, 2024. I've seen this higher in some years, and I've seen nothing offered some years. Just look around and grab any free money you can. I think you should also seek some bonus contributions from the loved ones, your child's fan club. Especially ask for financial gifts when your child is under 4 years old, they'll never remember opening just a boring check for their birthday and not the latest toy craze they'll surely bore of soon before creating unnecessary landfill. Wink!

What about student loans?

You can now use your 529 to pay back up to $10,000 in student loan repayments over your lifetime! So, if you have 529 funds to use but the market's down that year and you want to let the funds grow/ride longer, you could pay that year's tuition another way, then you'll be able to use that parked 529 money later on (ideally when the value/the market has rebounded) for some of the future student loan repayments instead (or even to transfer it to another future beneficiary). Qualifying up to $10k in 529 distributions as non-taxable if spent on student loan repayments added even more flexibility to the 529 equation. Smiles!

Now my own question: What else is on your minds?

What other questions come up for you about saving for / financing college? Submit them in the comments section down below (must be a Club member first to post a comment, a pop-up will walk you through easily signing up and creating a Club account when you try to comment). I'll try to answer quickly but hope the other Club members beat me to it and we start a helpful thread with multiple views on the topic! Let's go!

And how about that new FAFSA process?

If you've survived this year's infamous FAFSA chaos, I'd love to hear how it went for you! Leave some comments, Club Friends! How's your financing work/planning going this year for those of you with college bound kiddos? I hope ultimately your FAFSA is completed by now and ideally successful!

If you're well beyond paying for college expenses, what are your best-known practices you can share with The Money Matters Club community? (And congratulations on that major milestone!)

One last tip:

If you attended our Club's 2023 5/29 Day discussion last year, you'll recall my dear friend Kim (reachable at: collegewise.com/counselors/kim-haselhoff | kimh@collegewise.com) advising you all, wearing her hat as a professional college prep counselor, to fill out that FAFSA even if you make way too much money or have way too many liquid assets available factoring into your family's expected contribution to the cost of college. This is because a completed FAFSA submission is a pre-requisite for eligibility for federal student loans and may be required for eligibility for any merit-based awards, grants, or financial resources too that the school may have to give of its own doing. [If you read this far, please like the post or leave this little egg you found in the comments, "College or bust!"] So, in sum, fill out those FAFSAs every year that you can and save in the ESAs that you can! You might as well!

Because money matters!

el

PS - Congratulations to the Class of 2024 (high schoolers and college grads)!!!

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E.M.Powers ("el") is a regular person with no particular financial credentials or expertise who happens to be a money enthusiast and the founder of The Money Matters Club, a virtual watercooler for like-minded individuals with a thirst for building their own financial health. Since 2006, she's helped thousands of co-workers build their financial literacy and wealth by participating in The Money Matters Club, a community she built on her employer's internal network. Since 2023, she's been attempting to scale The Club's reach through its second home on the World Wide Web. Her opinions--as well as the opinions of all participants--are just that: opinions, which are subject to flawed logic, math, typos and correction. She keeps a growth mindset and is also always learning something new or bolstering her own understanding after discussions at The Club. All information shared is done so with the best intent to inspire and empower others to learn more about money considerations toward building their own financial muscles. Nothing shared is meant as individualized advice that anyone should act on without doing their own curious research and personal decision making. There are no dumb questions at The Money Matters Club. Your financial health and literacy are what this Club cares about. All investing involves risk. All results can and will vary.

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