Why financial planners love 529 college savings plans as the best way to save for college?
AI's response in regular print | Beverly Hills, CFP®, Joe O'Boyle's in italics
OpenAI’s ChatGPT tool responds to an investor question and Certified Financial Planner™ professional, Joe O’Boyle, fine tunes the AI response (in italics). This should be fun!
“Why financial planners love 529 college savings plans as the best way to save for college?”
Financial planners love 529 college savings plans as their favorite way to save and invest for college due to the potential for tax-free, compounded growth. In addition, the 529 college savings plan account owner—typically a parent—maintains complete control over the account. Also, anyone may contribute to a 529 plan (regardless of income), annual contribution limits are high, you can transfer balances between different family members by switching beneficiaries (to avoid a potential penalty) and 529 college savings plans are becoming increasingly more attractive retirement and estate planning vehicles.
A 529 college savings plan is considered one of the best ways to save for college because it offers several advantages. These include:
Tax benefits: Contributions to a 529 plan are usually made as after-tax contributions while the money in the plan grows tax-free. Withdrawals from 529 plans used for qualified educational expenses (see below) are also completely tax-free.
While not deductible at the Federal level, 529 plan contributions may offer a state tax deduction in over 30 states. Currently, three states offer tax credits and seven states offer tax parity on contributions to plans in other states. California does not offer a tax deduction, so many Californian’s select another state plan due to better investment options. The primary reason investors love 529 plans is that contributions are invested in mutual funds and may grow completely tax-free when used for qualified college education expenses.Flexibility: A 529 plan can be used to pay for a wide range of educational expenses, including room and board, tuition, books, computer, internet and other qualified expenses. However 529 funds may not be used for gas or transportation expenses to-and-from college.
You may also use up to $10,000 each year towards private school tuition expenses for kindergarten through 12th grade (K-12) per beneficiary, so a 529 plan is not just for college expenses. Qualified education expenses also include amounts paid as principal or interest up to a $10,000 lifetime maximum on qualified student loans for a designated beneficiary (or the designated beneficiary’s sibling).Control: The account owner retains control of the account, and can change the beneficiary, or even withdraw the money for non-educational expenses, although taxes and penalties may apply.
The money is entirely in the account owner’s control—which parents love—even when your child becomes an adult. This is a key difference between a UGMA/UTMA account where your child will ultimately gain control over the money once they reach the age of majority (typically age 18 in most states, but will differ per state).Low fees and investment options: Many states offer plans with low fees and a range of mutual fund investment options, allowing account owners to choose a plan that aligns with their risk tolerance and investment goals.
Many plans ofter popular age-based (target date) mutual fund options that align with the date your child (the beneficiary) will go to college. These age-based mutual funds invest more aggressively in stock funds when your child is younger and automatically become more conservatively invested in bond funds and money market funds as your child gets closer to using the funds for college.Attractive Estate-Planning vehicle: in 2023, you may contribute up to $17,000 ($34,000 for married couples) annually to a 529 plan without gift-tax consequences. Under a special election, you may invest up to $85,000 ($170,000 for married couples) at one time by accelerating five years’ worth of investments. This strategy is commonly referred to as “super-funding” a 529 plan which affluent families take advantage of because the money may potentially grow tax-free outside of your estate (while you still maintain control over the funds as the account owner).
Transfers allowed to family members: You also may change the beneficiary of a 529 plan to a family member as many times as you would like (the IRS has a very broad definition of family). For example, eligible relatives may include immediate family, extended family such as a cousin / niece / nephew, stepfamily, and even in-laws. This also provides a workaround to avoid a potential penalty if the existing beneficiary does not need the funds for college.
Rollover up to $35,000 to a Roth IRA: Due to the Secure 2.0 Act, starting in 2024, an unused balance in a 529 plan can be rolled over to a Roth IRA. Note: the amount rolled over can’t be more than the Roth contribution limit for a given year, which is $6,500 for the 2023 tax year. You also can’t roll over more than $35,000 total in the beneficiary’s lifetime. Another condition is that the 529 plan must have been open for at least 15 years. However, the rollover contributions aren’t subject to the Roth IRA’s typical income eligibility limits. This helps alleviate concerns for families about leftover funds in a 529 plan being subject to a 10% penalty (on the gains only) when not used for qualified college expenses.
Financial aid (FAFSA) nominal impact: A parent owned 529 plan is generally considered an asset of the parent, which means that for the FAFSA financial aid calculation only 5.64% of the account value is expected to be used toward college. This provides a significant advantage over UGMA/UTMA custodial accounts or student owned 529 plans, which FAFSA treats as 20% of the assets expected to be used toward college. In the majority of cases, a 529 plan will have a minimal effect on the amount of aid you receive and will end up helping you more than hurting you.
Overall, a 529 college savings plan is a flexible, tax-advantaged way to save for a child's education, that gives parents complete control over the funds, and can make it more affordable for families to pay for college.
What did you think? How did AI do?
About OpenAI’s ChatGPT tool:
GPT (short for "Generative Pre-training Transformer") is a type of language model developed by OpenAI that is trained to generate human-like text. ChatGPT is specifically designed for generating text in a conversational style. It is a machine learning model and has been trained on large datasets of real-world conversations in order to learn the patterns and styles of human communication.
Joe O'Boyle is the founder and principal of O'Boyle Wealth Management, a full service financial planning and investment management firm, located in Beverly Hills, California. Joe O’Boyle was named to InvestmentNews 40 under 40 class of 2016, and has a catalog of financial planning and investing articles on Money.com & U.S. News. Disclosure information.