529s, 401(k)s, and Extra Money in Washington

Exploring the Expansive Uses of 529 College Savings Plans

In a recent episode of Motley Fool Money, personal finance expert Robert Brokamp engaged in a conversation with Martha Kortiak Mert from Savingforcollege.com to discuss the evolving landscape of 529 college savings plans. These plans have become increasingly popular due to their tax advantages and expanding eligibility for qualified expenses.

One of the most significant developments is the inclusion of K-12 tuition and related educational costs as eligible expenses. This expansion allows parents to use 529 funds for a broader range of educational needs, including curricular materials, online learning resources, and private tutoring. Additionally, standardized test fees like SAT and ACT can now be covered under these plans. The limit for K-12 expenses has also increased from $10,000 to $20,000 per year per beneficiary, starting in January.

For post-secondary education, 529 plans can cover college tuition, room and board, books, supplies, and even computers. They also extend to trade schools and vocational training programs, making them a versatile tool for preparing children for various career paths. Certifications and continuing education, such as welding or HVAC training, are now considered eligible expenses. This flexibility makes 529 plans an attractive option for families looking to support their children's educational aspirations.

Choosing the Right 529 Plan

Selecting the appropriate 529 plan involves considering several factors. While many states offer tax benefits for contributions, it's essential to evaluate the investment options and performance of different plans. Some states provide direct-sold plans that can be opened online, while others require the assistance of a financial advisor or broker.

Martha Kortiak Mert emphasizes the importance of comparing plans based on their performance, investment options, and ease of use. She suggests reviewing the rankings provided by organizations like Morningstar and Savingforcollege.com, which assess the overall quality of 529 plans. Key criteria include investment returns, features that facilitate saving (such as gifting options), and the likelihood of continued excellence from the plan administrator.

It's also possible to transfer funds between 529 plans without any penalties, allowing individuals to optimize their tax benefits. For instance, contributing to a state plan with favorable tax incentives and then transferring the funds to a higher-performing plan can maximize both tax savings and investment growth.

Financial Aid Considerations

Understanding how 529 plans affect financial aid eligibility is crucial for families. A 529 plan owned by a parent is considered a parental asset on the FAFSA form, with up to 5.64% of its value included in the calculation. However, grandparent-owned 529 plans are not reported on the FAFSA, offering a strategic advantage for those seeking to minimize the impact on financial aid eligibility.

This distinction has led to some confusion, but recent changes have simplified the process. Withdrawals from grandparent 529 plans no longer count as student income, reducing the potential negative impact on financial aid. This change has made it easier for grandparents to contribute to their grandchildren's education without affecting their eligibility for aid.

Additional Benefits and Flexibilities

Beyond the immediate educational benefits, 529 plans offer additional flexibilities that make them even more appealing. For example, leftover funds can be transferred to a Roth IRA for the beneficiary, providing a valuable boost to their retirement savings. This feature adds another layer of long-term financial planning to the benefits of a 529 plan.

Moreover, the ability to transfer funds to another beneficiary if the original recipient does not need the full amount ensures that the money is used effectively. This flexibility is particularly beneficial for families with multiple children, as they can tailor their savings strategies to meet each child's unique needs.

Conclusion

The expanded uses of 529 plans, combined with their tax advantages and flexible investment options, make them an essential tool for families planning for their children's education. By carefully selecting the right plan and leveraging the available features, parents and grandparents can ensure their children have the financial support needed to pursue their educational goals. Whether through traditional college degrees, vocational training, or other forms of education, 529 plans provide a robust foundation for future success.