529 Plans: The Need To Know Details, Ep #20

In February of 2020, the student loan crisis hit a record $1.6 trillion. It’s not uncommon to talk to college graduates who have thousands of dollars in debt. Many pre-retirees would like to help pay for or fund their grandchildren’s education. It’s personally on the top of my list. I believe college education is a gift that can never be taken away.

How do you help save money for your children’s or grandchildren’s college education? What’s the best way? One of the best ways to save money for college is with a 529 plan. In this episode of Retirement Made Easy, I answer some commonly asked questions about 529 plans.

You will want to hear this episode if you are interested in…

• [2:55] What if my child doesn’t go to college?
• [7:51] What are the benefits of a 529 plan?
• [12:20] How the SECURE Act changed the game
• [14:35] How you could invest the money in the 529
• [16:49] How much is enough to save?

What if your child or grandchild doesn’t go to college?

The most common objection I hear to funding a 529 College Savings plan? What if they choose not to go to college? Is that money lost? No—here are your options:

• Option #1: Change the beneficiary to another child. If your son goes into the military and doesn’t need the 529 plan, you can change the beneficiary to his sibling.
• Option #2: Change the beneficiary to a blood relative. If there’s not a sibling that could use the funds, you can look at a blood relative (i.e. a cousin).
• Option #3: Withdraw the funds. If there are no other blood relatives that could use the funds, you can withdraw the funds. You’ll likely be hit with a 10% penalty and you will be taxed on the capital gains. But the money is not lost.

With that being said, this rarely happens in my experience. Plus, if the beneficiary wants to take a class or get a certification at some point, this money can be used toward that as well.

The benefits of a 529 plan

529 plans used to be only college savings accounts. A couple of years ago, the rules were changed. Now, a 529 can also be used for K–12 private schools. But most people use them for college savings. If you live in a state that offers a state tax deduction for the money you contribute, that’s helpful from a tax standpoint.

Secondly, the account owner maintains control of the funds in the account. The beneficiary doesn’t have control over the account or any say in how it’s invested. You get to make sure the money is used for its intended purpose and not wasted.

The next big advantage? The money you contribute is allowed to be invested. When the money is withdrawn and used for qualified educational expenses, it can be withdrawn tax-free without penalty. How did the SECURE Act (passed in 2019) extend the power of 529s? How did it change their use? Listen to learn more!

How you could invest the money in the 529

If the child in question is 17, I would be inclined to invest the money conservatively. There’s a short amount of time before he or she needs the money. If college is only a couple of years away, it may not be the best idea to invest aggressively.

But if your granddaughter is 2—you have 16 years for the funds to grow tax-free. You can invest it aggressively through those 16 years. As you get closer to her 18th birthday, you can adjust the risk that you’re taking in the 529. As the owner of the account, you’re in charge of how those funds are invested. Have a backup owner on the plan (i.e. spouse) if something happens to you.

You can never save too much for a college education

How much should you save for a college education? It depends on your child’s or grandchild’s goals and where they want to be educated. In most cases, you can’t save enough. One year of tuition at Vanderbilt is $73,000. That’s the direction this country is headed—and why we are facing a student loan crisis. It’s difficult to overfund an education.

I had one client who was very generous and wanted to help his grandchildren with their college education. He knew he could fund a 529, but he wanted them to put some effort into earning it. So he told his oldest granddaughter that he’d give her $100 for every scholarship she applied for.

After months and months, she applied for 40 different scholarships. So he wrote her a check for $4,000 to use for college. At the end of the day—out of the 40 she applied for—she got awarded 6 of the scholarships. They amounted to $12,000 in scholarships. She got $16,000 in total. What a great way to make your kids or grandkids put some effort in!

For all of the details on 529 plans and investing in your child or grandchild’s future education, listen to the whole episode!

Resources & People Mentioned

• The Secure Act