Happy 5-29 Day – 2023

Today is National 529 College Savings Day, a day to raise awareness about the value of planning and saving for higher education expenses with 529 plans. The cost of a college education has been increasing for years at a higher rate than annual inflation on other living expenses, so the requirement to save for your child’s education expenses is important.  A college education is a good investment in your child’s future opportunities as demonstrated by survey after survey comparing college graduates with individuals that have a high school diploma.  However, a college education may not be the best thing for a child when their family ends up saddled with tens of thousandths of dollars in student debt.  Therefore, saving for your child’s education is an investment in your overall family financial goals as well.  

  1. Basic Characteristics of a 529 Plan

The best college savings option available for most people is a 529 plan that is sponsored by a State government, employer, or private company where anyone may contribute funds on behalf of an individual beneficiary.  The earnings on the 529 plan assets grow tax deferred and they are state and federal income tax free if the withdrawals are used for higher education expenses including tuition, books, fees, and room and board.  

A 529 education savings plan that some states offer charge small fees and an added bonus comes into play when your home state offers a state tax deduction.  Many states offer a state income tax deduction for contributions to a 529 plan in your home state up to certain limit.  For example: New York state offers a state income tax deduction of up to $5,000 ($10,000 for married couples filing jointly) for contributions if you are a New York State taxpayer.

The account ownership is retained by the contributor, so the beneficiary can be changed at any time in case the original beneficiary does not attend college, or does not need the money. Section 529 plan funds do not count as the student’s assets for financial aid purposes. The 529 plan set up by a relative will not show up on financial aid forms unlike the parents’ contributions that will be reflected on the financial aid documents. 

  1. How much can be contributed to a 529 Plan and what type of investments should be used?

Total 529 plan contribution limits are set by the states and can be as high as $529,000. One of the many benefits of saving for a child’s future college education with a 529 plan is that contributions are considered gifts for tax purposes. In 2023, gifts totaling up to $17,000 per individual will qualify for the annual gift tax exclusion, up from $16,000 in 2022. Federal law also allows single taxpayers to make a one-time lump-sum contribution of $85,000 to cover five years. Under the above gift provision, a contributor to a 529 plan may elect to apply the contribution against the annual exclusion equally over a five-year period while filing a gift tax return for the year in which the gift was made. The contributor can set up a 529 college savings plan for each grandchild and use the approach to remove significant assets from their estate. 

The majority of 529 plans offer age-based portfolios and provide the contributor the opportunity to build their own portfolio. The main feature of an age-based portfolio is that the investment mix starts out with mostly stock mutual funds and as the time gets shorter before the beneficiary will need the money for college the investment mix becomes more conservative.  The idea is to be aggressive when the time horizon is many years away before the money is needed and then preserve what has been accumulated when the money will be needed in the near future. If an age based 529 plan is not offered by the sponsor of the plan you choose, you can basically duplicate the age-based approach with a mixture of quality mutual funds.  

  1. What State 529 Plan Should I Use?

The State 529 plans vary in the major areas of state tax benefits, the company used to manage the plan, the number and diversity of investment options.  The website SavingforCollege.com has a link to a 529 Evaluator that can be used to compare different 529 plans. You do not have to set up the 529 plan in the State in which you live, or the beneficiary lives.  The funds in a state sponsored 529 plan in one state can be used for education expenses in any state.  A recommendation is that everyone should investigate the plan in their home state first to take advantage of any state tax breaks that may be available, but anyone may contribute to plans in any state.

  1. How to Start Saving?

The first steps are to conduct some research regarding the highest rated 529 plans, determine how much it costs now for an undergraduate degree at your State’s universities, and find some money in your budget to begin saving as early as possible.  We can help you with the process at Lydford Financial where we are passionate about encouraging education for our youth and laser focused on identifying ways to fund your child’s, or grandchild’s future education needs.  There is no better time than now to start the process.  A 529 plan offers the best combination of flexibility, tax advantages, education related expenses covered, and investment options of any higher education saving option. 





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