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In Changing Times, Does Investing in a 529 Plan for College Still Make Sense?

High costs and an uncertain job future have some parents weighing the idea of college.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/College student: 529 college savings plan
5 min read
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Key Takeaways

  • The average annual tuition at a private four-year college is more than $32,000
  • 529 college funds can help supplement costs
  • Any family member can use a 529 plan—even the parent

Among the many things COVID-19 changed is how we view post-secondary education. Many parents and students now ask if the traditional college experience is still the way to go, and whether a 529 college savings plan is still worth it.

Thanks to the novel coronavirus, college campuses have become a mix of online and in-person learning. Many of the extracurricular activities that arguably help make going away to college worth the cost aren’t happening because of social distancing restrictions. Automation and technology could also make certain jobs obsolete in the future.

That’s made parents, and perhaps even students, reconsider their thoughts about college in ways they never did before. The College Board lists the average annual tuition and fees for one year at a four-year private college at more than $32,000, and a four-year public college costs nearly $24,000 for out-of-state students. Over four years, that’s more than $100,000 before you even count the costs of housing, food, books, and transportation if your child attends a college away from home.

Given the cost of higher education, along with a possible rethink of its utility, parents may wonder if they should invest in a 529 college savings plan. No one has a crystal ball, but there are still plenty of benefits in these plans, in part because 529 college funds can be used for a wide variety of educational purposes.

They’re also not just for your kids.

Why 529 College Savings Plans Make Sense

For one thing, a 529 account is a savings tool that can be used in many different ways.

Even if students attend a college where the money in a 529 account isn’t enough to cover the entire cost of schooling, the funds can supplement scholarships and loans, said Dara Luber, senior manager, retirement product at TD Ameritrade.

In addition to tuition, 529 plans cover the cost of education incidentals such as books, computers, and other items, and sometimes they cover room and board. In some states, 529 plan money can be used for kids’ K-12 educational costs.

That’s not to say this is a perfect savings tool. The pros include having a tax-sheltered account as a college fund, while the cons are the uncertainty of what college might look like in the future.

Although most people think of traditional college when they think of secondary education, college isn’t necessarily right for everyone. Some people excel in hands-on work and would be better suited to a technical, vocational, or other type of school. Money in 529 college funds can be used for these other types of schooling, as long as the school is eligible.

Certain highly skilled trade jobs are unlikely to be replaced by robots and are in high demand, such as mechanics, electricians, and dental hygienists.

“As a family, you need to consider what post-high school education might look like for your child,” Luber said.

Another benefit of a 529 plan is that the money saved is not earmarked for a particular family member. And the Internal Revenue Service (IRS) has a broad definition of “family member.” So, if your child doesn’t use the money in the account, it can be used for other children and family members, including spouses, siblings, nieces, nephews, cousins, and grandchildren. 

When Saving for College, Everything Counts

If the cost of college seems so daunting that parents think they may not be able to invest and save to help pay for all of their college expenses, Luber noted it’s still worth considering a 529 plan as they are tax-deferred vehicles.

“It’s better to start saving than not at all, even if it’s just $25 or $50 per month,” Luber said, adding that “saving for retirement should come before saving for college.”

Parents can contribute up to $15,000 per year per person in a 529 plan without incurring federal gift taxes, or they can save up to $30,000 if parents are married and filing jointly. People of means can frontload five years’ worth of 529 contributions. Single people can put in up to $75,000 per child—or $150,000 if married and filing jointly—and write off the contribution from their taxes over five years.

There are no age limits associated with 529 plans—anyone can use them, including you. If your child decides not to go to school, you can take the money in the 529 plan and use it for your own secondary education. That could include graduate school or enrichment courses at a local community college. The institution just has to be eligible to receive the money.

If the money in a 529 plan ends up not being used by anyone, parents haven’t completely lost that money. In a worst-case scenario, any money in the account can be withdrawn and they would pay the tax penalty.

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Key Takeaways

  • The average annual tuition at a private four-year college is more than $32,000
  • 529 college funds can help supplement costs
  • Any family member can use a 529 plan—even the parent

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Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

An investor should consider the particular 529 college savings plan’s investment objectives, risks, charges and expenses before investing.  The Program Disclosure Statement, which can be obtained from the plan issuer,  contains more information, and should be read carefully before investing.  

Investors should consider before investing whether their or their beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program and should consult their tax advisor, attorney and/or other advisor regarding their specific legal, investment or tax situation.  

This material is provided for general and educational purposes only, and is not intended to provide legal, tax or investment advice, or for use to avoid penalties that may be imposed under U.S. federal tax laws. This material is not an offer to sell or a solicitation of an offer to buy any securities. Any offer to sell units within the Plan may only be made by the Program Disclosure Statement and Participation Agreement relating to the Plan.

TD Ameritrade does not provide tax advice. Every individual’s tax situation is different, and it is important to consult a qualified tax advisor regarding the application of the Plan’s benefits to your own individual situation.

Participation in a 529 plan does not guarantee that contributions and the investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses, or that a beneficiary will be admitted to or permitted to continue to attend an eligible educational institution.

Investments in 529 plans are not guaranteed or insured by the FDIC, SIPC or any other government agency, and are not deposits or other obligations of any depository institution. A donor may elect to treat a contribution to a beneficiary’s account as made ratably over a five-year period. As a result a donor may make a contribution to a beneficiary’s account of up to $75,000 (or up to twice that much if the donor and his or her spouse elect to “split” gifts) without any negative gift tax consequences, so long as the donor does not make any additional contributions to the account (or any other gifts to the account beneficiary) during that tax year or any of the succeeding four calendar years. A Federal Gift Tax Return (Form 709) is required to be filed. Please consult with your tax or legal professional. If the donor dies before the end of the five-year period, the portion of the contribution allocable to years after the donor’s death will be includible in the donor’s estate for Federal estate tax purposes.

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