The Ins and Outs of 529 Plans
What's the best 529 plan? How does the money affect financial aid? We've got the answers you seek about these popular college-savings accounts.
I have five nephews and two nieces. Can I set up state-sponsored 529 college-savings accounts for all of them?
You certainly can. You can open a 529 account for a niece, nephew, godchild -- even the neighbor's kid. As long as you own the account, your contribution also qualifies for a state income-tax deduction if your state offers one.
I heard that it's better to have a 529 account owned by the child rather than the parent so that it's not considered the parent's asset in determining financial need. Any merit in this?
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Actually, you have things exactly reversed. When it comes to calculating college financial aid, it's much better to have assets in the parent's name. In the federal financial-aid formula, parent-owned accounts are assessed at 5.6%, compared with the 20% assessment on student savings.
By law, 529 accounts are considered parental assets, so they automatically qualify for favorable financial-aid treatment.
We would like to start a college fund for our daughter. But if she doesn't attend college, we'd like to be able to use the money as a nest egg to start her life. What college-savings plan would give us the most flexibility?
A 529 account would probably also work in your situation.
Because you're primarily interested in a college fund, a 529 would let you take advantage of a slew of tax breaks: Your contributions may be eligible for a state tax deduction, your savings would grow tax-deferred, and the earnings would escape tax altogether if the money is used for qualified educational expenses, such as tuition, fees, and room and board.
But if your daughter doesn't go to college, you still have some control over the money. You could transfer the funds to another family member and preserve the tax benefits, or withdraw the money and pay income tax plus a 10% penalty on the earnings.
We'd like to set up a college fund for our grandchildren. But I'm an investor and I'm not happy with the returns I see quoted for 529 plans. What advice do you have for setting up a private investment fund?
You could set up an investment account in your name earmarked for your grandchildren. But I wouldn't reject 529 plans out of hand.
It's true that the most popular investments in these plans are preset portfolios of stocks and bonds that become more conservative as your child gets older. But many plans let you mix and match your own investments.
If your state offers an income-tax deduction, look there first. If your state doesn't offer a deduction, you can open an account in another state with better investment options. For do-it-yourself investors, Kiplinger's likes the College Savings Plan of Nebraska. It offers 20 mutual funds from American Century, Fidelity, Pimco and Vanguard. See The Best 529 College-Savings Plans for more of our favorites.
MORE: Everything You Need to Know About 529 Plans
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Janet Bodnar is editor-at-large of Kiplinger's Personal Finance, a position she assumed after retiring as editor of the magazine after eight years at the helm. She is a nationally recognized expert on the subjects of women and money, children's and family finances, and financial literacy. She is the author of two books, Money Smart Women and Raising Money Smart Kids. As editor-at-large, she writes two popular columns for Kiplinger, "Money Smart Women" and "Living in Retirement." Bodnar is a graduate of St. Bonaventure University and is a member of its Board of Trustees. She received her master's degree from Columbia University, where she was also a Knight-Bagehot Fellow in Business and Economics Journalism.
-
Stock Market Today: Stocks Slide as Solid GDP and Softer Inflation Vex Rate Cut Bets
Encouraging economic news damped hopes for accelerated rate cuts.
By Dan Burrows Published
-
Advanced Micro Devices Stock Sinks on Dismal Guidance. What to Know
Advanced Micro Devices is one of the worst S&P 500 stocks Wednesday after the chipmaker's Q4 outlook left Wall Street wanting more.
By Joey Solitro Published
-
529 Plans: A Powerful Way to Tackle Rising Education Costs
Contributions to 529 plans grow tax-free and are not taxed when they are used to pay for qualified educational expenses for the beneficiary.
By Denise McClain, JD, CPA Published
-
Tax Tips for Transferring Excess 529 Plan Funds to Roth IRAs: The Tax Letter
The Tax Letter 529 plans can help blunt the cost of paying for college. But if you want to use leftover funds there are some tax tips to bear in mind.
By Joy Taylor Published
-
529s: No Longer the Ho-Hum Investing Device for College
Changes to the plans allow for the savings to be rolled into a Roth IRA, as long as certain rules are met, if a child decides not to pursue their education.
By Neale Godfrey, Financial Literacy Expert Published
-
529 Plans: Give the Gift of Education (and Compounding)
As the cost of college tuition skyrockets, parents and grandparents can take advantage of tax-efficient 529 plans and higher limits on gift and estate taxes.
By Mel Casey, CFA®, CAIA Published
-
Have Leftover 529 Funds? Expert Strategies for Unused Balances
Excess 529 funds represent both a challenge and an opportunity, and knowing your options is essential.
By Marguerita Cheng Published
-
Using a 529 Plan? Here’s What to Keep in Mind
As the school year progresses, ensure you’re using the money for qualified expenses and keeping track of documentation. Taxes and options for unused funds are also considerations.
By Julie Virta, CFP®, CFA, CTFA Published
-
Three Reasons You Need to Use a 529 Plan (and Two Reasons You Don't)
Tax benefits and a Roth IRA feature make 529 college savings plans attractive, but they're not a one-size-fits-all option.
By Shane W. Cummings, CFP®, AIF® Last updated
-
529 Plans Get a Boost With Tax-Free Rollovers to Roth IRAs
Thanks to the SECURE 2.0 Act, you're now able to roll over funds from your 529 into a Roth IRA, as long as certain conditions are met.
By Erin Bendig Last updated