7 Things To Know About 529 Plans
Laurel has had college on the brain since 8th grade, but now that she’s in her sophomore year of high school, the prospect of college is feeling real. Like, crazy real. As in, we’re now in an era of parenting where we have friends whose kids are in college. As in, just last month I took Laurel to California with me for work and she wanted to visit a college campus. As in, educational savings accounts (529 plans) come up regularly in conversation. Seriously, the adulting is real right now!
I have partnered with MEFA (Massachusetts Educational Financing Authority) for several years now and it’s been such an eye-opening experience. Part of this journey has been an emotional reckoning, but the tactical side of me has especially loved digging into the myths and confusion around 529 plans because as I mentioned, 529 plans now come up regularly in conversation and there’s a ton of uncertainty about them. MEFA covers some common myths about saving for college, but as I was thinking about this post (and my forthcoming visit to the U.Fund Dreams Tour tent at the Assembly Row Riverfest), I wanted to really dig in to some of the confusion and uncertainty I have been hearing about 529 plans. Below are 7 crowd-sourced questions I lobbed to Julie Shields-Rutyna, Director of College Planning at MEFA.
How To Start + Grow A 529 Account
Q: How do I start and add money into my U.Fund account?
A: See our website for Information on MEFA’s U.Fund, the Massachusetts 529 college savings plan (including how to enroll). You can add money to your U.Fund account in many ways:
You can send in a check to Fidelity.
You can set up access to your account through Fidelity’s website and transfer funds electronically.
You can have a set amount withdrawn from your bank account automatically on a recurring basis, or have your HR department send funds directly from your paycheck.
Additionally, other family members or friends can send checks to Fidelity with your account number. They can also give you the check and you can take advantage of Fidelity’s mobile check deposit with your smartphone.
You can also set up an electronic gifting page for your child and send the link to friends and family allowing them to electronically gift money directly to the child’s account.
Qualifying for Financial Aid
Q: I'm worried that if I put too much away in the 529 my child won't qualify for financial aid. Is that true?
A: This is one of the most common myths we like to dispel. The truth is your college savings will help you much more than hurt you. The good news is that the financial aid formula treats parent assets quite favorably. While you will report any money that you save (with the exception of your retirement accounts) on your financial aid applications, at most 5.6% of your assets per year will be considered available to help pay for college costs. This means most of your savings will be protected within the formula.
Allocating 529 Usage Across Years
Q: Say I can ultimately put away $40,000 before my child starts college but I want to direct $10,000 each year to tuition across 4 years. Is it possible to do that or would the entire $40,000 get wiped out in the first year or two (depending on what type of school my child goes to)?
A: How you decide to spend your college savings is up to you. Once you receive a financial aid offer from the college your child will attend, you will calculate the balance due to the school. Families usually meet the balance due with a combination of savings, current income, and loans and each family’s plan will be unique. One family may decide to use current income and savings in the earlier years and postpone borrowing until later on, and another family might decide to spread the savings out over 4 years and supplement with current income, borrowing, and gifts from family members each year.
Transferring 529 Funds To A Sibling
Q: What happens if I put money into my child’s 529 and then my child doesn’t need the funds (e.g., gets a full scholarship, opts for a different path)? If my child has a younger sibling, can I transfer those unused funds to the sibling?
A: The answer to this question is that you have many options. If you want to avoid paying taxes and a penalty on your 529 earnings, you could:
Change the beneficiary to another qualifying family member (in your case, a sibling)
Hold the funds in the account in case the beneficiary wants to attend grad school later
Make yourself the beneficiary and further your own education
Rollover the funds to a 529 ABLE account, a savings account specifically for people living with disabilities (if that applies in your situation)
As of January 1, 2018, parents also have the option to take up to $10,000 in tax-free 529 withdrawals for K-12 tuition
However, if these choices don’t apply, the earnings portion of non-qualified withdrawals (but not the contributions) may be subject to federal and state income tax as well as a 10 percent penalty. That 10% penalty is waived (though the earnings are still taxed) if the student earns a tax-free scholarship, dies or becomes disabled, receives educational assistance through a qualifying employer program, or attends a U.S. military academy.
Setting up 529 Plans for Multiple Children
Q: How do you set up 529s so they don’t hurt your chances for financial aid if you have multiple children (i.e., if you are saving to help all of your children go to school in one 529, will the schools look at the pot of money and figure you could pay for full tuition for one child even though you mean for it to be used by 2 or more children?) or does setting up separate accounts address that? But then, what if one 529 ends up with extra funds (because one child didn’t use it all?!
A: The good news is that the financial aid formula treats parent assets quite favorably. While you will report all 529 accounts for all children as assets on your financial aid applications, at most 5.6% of your assets per year will be considered available to help pay for college costs. This means most of your savings will be protected within the formula. Of course, if one account ends up with extra funds, those funds can be transferred to the other siblings’ accounts.
Grandparents and 529 Plans
Q: Is worth it to open a 529 in a grandparent’s name instead of our own? You hear that it helps for financial aid considerations, but also hear that once the child starts withdrawing funds it is treated as student income. If you do use a grandparent’s 529, what happens if the grandparent passes on before the child is in college?
A: It’s wonderful for grandparents to help save for college for their grandchildren. However, there are a number of options and considerations. As one option, grandparents can deposit the money into a 529 owned by the student’s parent. It is then known that those assets will be treated as parent assets and assessed at a maximum of 5.6% in the financial aid formula. As another option, grandparents can open a 529 themselves, be the account owner, and maintain control over the funds in the account. In that case, those assets are not factored into the financial aid application of the student until the funds are withdrawn and used for the benefit of the student. Those withdrawn funds are then considered student income in the year they are withdrawn, and are reported on the FAFSA under the question that asks the student about “monies paid on your behalf,” which then considers these funds as student income. Depending on when in the student’s college experience the grandparents withdraw the 529 funds to pay, the withdrawal may or may not affect future financial aid for the student. Withdrawing the funds in the student’s later college years can help a family avoid reporting the funds on a FAFSA, unless a student attends graduate school. Grandparents and parents should discuss these options up front and have a good understanding of how their actions may or may not affect financial aid. MEFA talks with many families about these issues and likes to see these conversations happen as early as possible.
When setting up a 529 account, most people choose a successor owner. The successor owner is someone designated by the owner to assume control of the account should the owner pass away or become otherwise incapacitated.
Different Investment Options
Q: In times of financial volatility, are there better ways to invest? 529s are not insured and for children who are already in high school, what are the options?
A: Any investment carries some risk. That’s why Fidelity offers an FDIC insured 529 option. This is the Bank Deposit Portfolio option listed. This safeguards your principal. The trade-off is that it is a very conservative investment and may not increase in value to the extent that other options would when the market is growing. Fidelity has investment specialists able to counsel you based on your preferences. You can contact them at 800-544-2776, 24 hours a day, 7 days a week. You can also visit them online at fidelity.com or visit in person at a Fidelity branch in MA. Whatever investment option you pick when completing your 529 application can be changed later. It’s more important to complete the application.
Disclosure: This post reflects a compensated editorial partnership with Fidelity/MEFA. All opinions about the importance of putting money into 529s are, of course, my own. To learn more about the 529 college savings account, hop over to the MEFA website.