The education savings plans known as 529s are one of the top ways for families to save for that ever-more expensive college degree — but many Americans still don’t know much about them.
Only 34% of American adults correctly identified the plans as educational savings tools, in a new 529 awareness study by Edward Jones. That’s the lowest the rate in the annual study has been since 2020, when it was 45%.
With “529 Day” just around the corner, on May 29, advisors have a perfect opportunity to discuss with clients whether the plans make sense for them and how to use them optimally. States, which sponsor the plans, will be celebrating the manufactured occasion with different initiatives aimed at encouraging saving for higher education, typically one of a family’s biggest expenses. Edward Jones will also recognize it as “Save for Education Day” at its branches around the country.
“With the current economic challenges we’re facing, such as rising interest rates and inflation, many individuals are shifting their priorities from saving for long-term goals to ensure they have enough to cover everyday expenses,” Steve Rueschhoff, a principal at Edward Jones who leads Managed Investments and Insurance, said of the new survey results. He added that he wasn’t sure of the exact reason for the drop in awareness, but other firm research had shown Americans became more interested in 529 enrollment after learning about the plans’ many benefits.
The price of college in America is growing at an estimated annual rate of 7%, and Americans pay more dollars out of pocket for their children’s educations than a decade ago. The average cost of college in the U.S. is around $35,551 per student per year, covering tuition, books, supplies and living expenses; and elite private institutions can charge double that.
Expensive school or not, failing to save in advance can be a costly mistake — and one that a 529 plan can play a big role in averting.
A 529 plan, also known as a qualified tuition plan, is a type of tax-advantaged investing account sponsored by a state or state agency or representative. It allows investors to save for future education expenses for someone who is a designated beneficiary — typically, the investor’s child — by investing dollars in a plan, then using their compounded value to pay for the beneficiary’s qualified educational expenses, such as college tuition or books.
Contributions to a 529 aren’t deductible for federal purposes, but qualified withdrawals for school expenses are tax-free. Several states allow deductions for state taxes; among them, Colorado, New Mexico, South Carolina and West Virginia allow a deduction of 100% of the contribution made, according to the Education Data Initiative.
Read more: Ask an advisor: I don’t have kids yet. Can I still save for their education?
By starting early and relying on the investments to compound over time, the accounts can grow sizably over the years through regular contributions. The plans don’t have annual contribution limits; lifetime contribution limits for a beneficiary vary by state, but range from $235,000 to $569,123.
There were over 16 million 529 plans as of the end of 2022 — a more than 50% increase from 10.1 million in 2009, according to the College Savings Plans Network, an affiliate to the National Association of State Treasurers. That number is a new record high, the network said, and it represents $411 billion of total assets.
“We do see this as an opportunity for financial advisors to initiate these conversations with clients, especially as we are in the height of graduation season and approaching back to school,” Rueschhoff said.
Amid recent legislation, there’s all the more reason to make full use of a 529. A provision in the second Setting Every Community Up for Retirement Enhancement Act, known as SECURE 2.0, will allow Americans come 2024 to convert unused 529 money into a Roth IRA for the beneficiary, up to a lifetime maximum of $35,000. Roth plans are funded with after-tax dollars, and their withdrawals are tax free.
Read more: College savings plan money left over? Hello, tax-free Roth
The 529 account has to be open for at least 15 years before being rolled into a Roth IRA. Contributions and growth from the past five years can’t be shifted over, and annual contributions to the Roth IRA would be subject to the usual IRA contribution limits of that year.
If 529 dollars are used for non-educational expenses, the account owner owes federal and state taxes, as well as a 10% penalty, on the earnings withdrawn. Previously, if a saver was stuck with money in an account because their child didn’t go to college, the only way to get the funds out was to pay the tax bill.
Financial Planning spoke with several advisors on common challenges they see when helping clients with 529 plans. Here are five, and tips on how to address them.