529 College Savings Plans FAQ

In College & Education Savings, General Financial Planning, Personal Finance, Personal Financial Planning by Chip Hymiller

I can tell you from experience that children grow up fast!  It is very hard for me to believe that my sweet daughter, Abbey, will be starting kindergarten soon.  Five years have passed in the blink of an eye!

What’s really scary is that I have a pretty good idea of how much college will cost in the year 2023 when I write the check (to NC State of course!) to pay for her first semester.  Fortunately, my wife and I have planned ahead and I hope that you will plan ahead too.  I would suggest that you consider utilizing a 529 College Savings Plan as a component of your college savings strategy.

Chip's Daughter's First Day of School

Section 529 College Savings Plans can be an excellent tool when saving for college.  While there are many benefits when using the 529 Plan, there are also a number of drawbacks to consider.  Here are a number of frequently asked questions:

What are 529 College Savings Plans and what are their benefits? 529 plans are state-sponsored investment vehicles designed to help families pay for expenses associated with college or other qualified post-secondary training.  Contributions to 529 plans are not federally tax deductible but some states, including NC, allow a state tax deduction.  The primary benefit is that investment earnings are not taxable as long as they are used to pay for “qualified” higher education expenses.

What are considered “qualified” higher education expenses? For 529 plans, qualified higher education expenses are generally those that are “required” by the college or university.  It generally includes items like tuition, room and board (with limits),  lab costs and in some cases computers.  The definition of qualified expenses for 529 plans are more restrictive compared to other college savings vehicles such as Coverdell ESAs and UTMA accounts.

Is there a penalty if money is used to pay expenses other than “qualified” education expenses? Yes.  If the money is used for a purpose other than qualified education expenses, the earnings portion of the distribution is taxed and penalized.  It is important that 529 Plans are not overfunded as the penalty for doing so can be significant.

How is money invested in these plans? Investment options vary on a state by state basis.  However, most 529 plans provide a limited list of investment alternatives.  We generally suggest the age-based or objectives-based investment options.

Who can setup and fund a 529 Plan? Anyone can setup a 529 plan and name anyone as a beneficiary.  There are no income restrictions.

Can the “beneficiary” on a 529 Plan be changed? Yes.  The beneficiary can be changed to a sibling or other family members.

Are 529 Plans considered when determining financial aid eligibility? Yes.  A 529 account owned by a parent for a dependent student is considered a “parental asset” when determining the expected family contribution.   However, 529 accounts owned by grandparents, other relatives, etc. would not be considered.

Who controls these accounts? The person establishing the account (usually the grantor) maintains the ability to make investment decisions, distribution decisions and names the beneficiary of the account.  The beneficiary (usually the child) does not have control of the 529 plan at any age, unless he is the owner of the account.

Are 529 plans the best solution for everyone? No.  529 plans should be one component of a college savings strategy.  Each college savings strategy should be customized and based on individual circumstances and preferences.

Where can I find more information? There are a number of online resources that can provide general information about college saving alternatives.  However, we believe that most personal financial decisions should be based on your objectives and your specific financial situation.  This is particularly true when it comes to saving for college.  There is truly no one-size-fits-all approach.  With that in mind, we would suggest that you contact our office to see how we may be able to help you.

About Beacon Financial Strategies

Beacon Financial Strategies is an advice-driven financial planning, tax and investment management firm that serves clients in Raleigh, Durham, Cary, Apex, Chapel Hill, RTP, NC and nationwide. Beacon offers both ongoing and introductory financial planning arrangements to individuals and families.  For more information, please contact us today.