The Rising Cost of Higher Education & the Opportunities with a 529 Plan

The Rising Cost of Higher Education & the Opportunities with a 529 Plan

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As the cost of higher education continues to rise, many families nationwide struggle with the challenge of securing the financial means to invest in their children’s future education. Amidst this financial struggle, one solution that often remains underutilized is the 529 Plan.

Understanding the 529 Plan

The 529 Plan, also known as a Qualified Tuition Plan, is a specialized investment account designed for funding higher education expenses. These specialized investment accounts take their name from Section 529 of the federal tax code and are administered by individual states. While many states offer tax deductions or credits for contributions to their own plans, you are not restricted to your home state’s plan.

Originally, these plans were limited to post-secondary educational costs; however, recent expansions have broadened their scope to include the following:

  • K-12 Education

    In 2017, private K-12 education became an eligible expense with tax-free withdrawals limited to $10,000 per year.

  • Apprenticeship Programs

    Recognizing the value of vocational training, the SECURE Act of 2019 expanded tax-free withdrawals to include apprenticeship programs expenses.

  • Student Loan Debt Repayment

    The SECURE Act of 2019 expanded to include up to $10,000 in student loan debt repayment for both account beneficiaries and their siblings.

  • Roth IRA Funds

    The SECURE Act of 2022 permitted rollovers of unused funds into Roth IRAs of up to $35,000 if the account is at least 15 years old.

State College, Pennsylvania, USA - August 4, 2023: Students walk along the paths of the University Park to the classroom lectures on the campus of Penn State university

Investment Considerations

When it comes to 529 plans, families have a range of investment options to consider, such as:

  • Socially Responsible Investing

    Beyond financial gains, 529 plans also allow you to invest with a purpose by opting for socially responsible investments and gaining the ability to support causes you care about while saving for education.

  • Static Portfolios

    For those who prefer a hands-on approach, static portfolios offer personalized control.

  • Education Savings Plans

    These plans are the most common type of 529 plans. Account holders can choose the investment they would like to invest in. Withdrawals can be used for both college and K-12 qualified expenses, including tuition, fees, room and board, and additional related costs.

Age-Based Portfolios:

Many plans offer age-based portfolios, which automatically adjust their asset allocation based on the beneficiary’s age. These portfolios shift from aggressive to more conservative investments as the beneficiary approaches college.

  • Prepaid Tuition Plans

    These plans allow the account owner to pay current tuition rates for future attendance at designated colleges and universities. These plans are offered by a limited number of states and higher education institutions. The money paid into a prepaid tuition plan is not guaranteed by the federal government and may not be guaranteed by some states. Similar to 529 savings plans, prepaid tuition plans grow in value over time; however, they do not cover the cots of room and board and are not available for K-12 education.

Transferability

Regarding transferability, there are rules in place governed by the Section 529 federal tax code.

Account owners can transfer to another 529 plan once a year, unless a beneficiary change is involved, which does not necessitate a plan switch. You can easily transfer 529 plans to specific family members, including:

  • Children
  • Siblings
  • Parents
  • Extended Family
  • In-Laws and Spouses

Empowering Families for Educational Savings

As families explore ways to save for educational purposes, thoughtful investment decisions are important. WPWealth understands the importance of qualified tuition plans and provides our clients with a clear path toward educational prosperity. Our team of trusted advisors are here to assist you through this process.