529 College Savings Plans:
7 Commonly-Asked Questions Answered
Parents and grandparents of children who will attend college often ask us questions about 529s. While there are tax benefits, one of the prime reasons 529s are appealing is the ability to segregate education savings from the rest of parents’ financial commitments. Education spending is one component of your broader financial plan, and we have to evaluate the plan you choose and how you fund it with that holistic viewpoint in mind.
1. One account per child, or one big one?
One question we get quite often: Should I have multiple accounts for each child, or should I just combine all of my children’s education spending into one account?
We recommend separate accounts for each child. Oftentimes, children will be in college at the same time. The combined expense is one reason why saving ahead of time can be beneficial. If both/all of your children are using the same 529 account, you will have to retitle/reassign the beneficiary every time you make a distribution for another child.
Additionally, as we’ll discuss below, investment options for 529s are typically oriented around the child’s education expense start date. Multiple children on one account complicates the investment decision.
2. Who owns the account
Oftentimes a couple wants to jointly own a 529; however, these accounts can only have one owner. A spouse can be named successor custodian to take control if the owner dies.
Grandparents can own a 529, but the main benefit of their ownership would be in the case that the child is on the verge of receiving financial aid. If your family has a relatively high income or substantial financial resources, your child will likely not qualify for financial assistance.
Otherwise, we recommend parental ownership. This ensures you keep full control over beneficiaries and distributions, and grandparents can still contribute to the account.
3. Choosing the plan itself
Every state sponsors a 529 plan, but you can use any state’s plan, regardless of where you live or where your child attends school. Savingforcollege.com is a wealth of information regarding 529 plans, and we recommend taking a look at their ratings of different states’ 529s to assess the best option for your child. Low fees and a decent investment lineup are the two main factors to look out for.
4. Picking investments (the easy part)
In some ways, 529 investments are the easiest part. We recommend choosing a target-date/enrollment-year option to match the year your child will start university. These plans operate off of a glidepath, starting with a majority of the account in equities and then gliding towards bonds as the university start date approaches in order to reduce volatility prior to the point at which funds are needed.
5. How much to fund
A more challenging question: how much should I put in the account for my child? Parents are reluctant to under or over-fund their children’s education accounts. We do 529 planning for parents and grandparents looking to fund these accounts. How?
We start by showing the current annual cost for a target school, then the inflation-adjusted future cost. Using an assumed growth rate, we arrive at a monthly or annual contribution per child needed to fully fund the child’s education. Then parents can make an informed decision about the amount they would like to fund prior to their children’s education start date. The earlier you start, the easier and cheaper it is to fund your child’s education.
6. Contribution mechanics
Preferred contribution schedules typically depend on family cash flow. Some families do a monthly draw, while others do a lump sum once a year. If you’re funding from a paycheck you may prefer monthly, whereas if you’re funding from an investment account, it might make more sense to make an annual contribution.
7. "What if I overfund it?"
What are the options if you overfund your child’s 529? There are a few. First, you could potentially reassign the beneficiary to another family member, even to a future grandchild.You could also rollover the account to a Roth (usually a multi-year process). Finally, if you do need to make a non-qualified withdrawal, you have to pay income tax plus a 10% federal penalty, but only on the earnings. And if a child has earned a scholarship, that penalty is waived.
We’re happy to produce an analysis of how to fund your child’s future education expenses. We don’t charge for 529 planning for clients, and are happy to help you fund your child’s future. Please reach out to discuss further.