5/29: Helping Your College Savings Grow

By TRG Advisors on May 29, 2021

A 529 college savings plan is a state-sponsored investment plan that enables you to save money for a beneficiary and pay for education expenses. You can withdraw funds tax-free to cover nearly any type of college expense.

Types of 529 Plans

The two main types of 529 plans — college savings plans and prepaid tuition plans— have some significant differences.

Savings plans are the more common type. The account holder contributes money to the plan, which is typically invested in a selection of funds. Account holders can choose the funds they want to invest in. 529 plan funds are professionally managed by well-established financial companies that offer a range of investment options, thus allowing you to tailor your portfolio to meet your needs and risk tolerance.

Prepaid tuition plans are offered by a limited number of states and some higher education institutions and allow you to lock in tuition at current rates for a student who may not be attending college for years to come.

Benefits of 529 College Savings Plans

There are a few things you need to know up front to make the most of your savings. If you do things right, no penaities or federal income tax will be due on your withdrawals. Before investing in a 529 Plan, consider the following to help make your 529 savings go as far as possible:

1. Make the most of it – Contributions qualify for the annual federal gift tax exclusion – $15,000 for individuals and $30,000 for married tax payers in 2021. Under special rules for 529 plans, five years’ worth of gifting can be accelerated into a single year for gift tax purposes. This forward gifting allows individuals to contribute $75,000 and married couples filing jointly to contribute $150,000 per beneficiary to help reduce your personal estate.
2. Maximize your contribution – Many states offer a deduction or credit for 529 contributions.
3. Keep good records – It’s up to you to maintain accurate records of expenditures should they be needed. If you withdraw funds for anything other than qualified expenses, you can incur penalties and will be subject to applicable state and/or federal taxes. It’s important that withdrawals you take from your 529 savings account match the payment of qualifying expenses in the same tax year.
4. Know which expenses qualify – When you pay qualified education expenses from a 529 account, your withdrawals are tax- and penalty-free. 529 plan funds can be used for tuition, books, room and board, and other education related expenses at most accredited colleges, universities, trade schools and post-secondary educational institutions. 529 plan funds can also be used for kindergarten through high school tuition up to $10,000 per year.
5. Money left over in your 529 plan? Make a smart move – With careful planning, you can avoid having money left over in your 529 account once your child graduates. By transferring 529 plan assets to another beneficiary, you typically can avoid penalties and continue to enjoy any tax benefits.¹
6. Consider how college savings affect student aid and loans – While individual colleges may treat assets held in a 529 plan differently, in general these assets have a relatively small effect on federal financial aid eligibility.²
7. You’re not penalized for scholarships – If your child receives a scholarship, you are allowed to take a tax-free, penalty-free distribution from the 529 in an amount equal to the scholarship received for that year.

The Rand Group is a team of investment professionals registered with Hightower Securities, LLC, member FINRA and SIPC & Hightower Advisors, LLC a registered investment advisor with the SEC. All securities are offered through Hightower Securities, LLC and advisory services are offered through Hightower Advisors, LLC. This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Investors may lose all of their investments. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. Hightower shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of Hightower Advisors, LLC or any of its affiliates. Third-party links and references are provided solely to share social, cultural and educational information. Any reference in this post to any person, or organization, or activities, products, or services related to such person or organization, or any linkages from this post to the web site of another party, do not constitute or imply the endorsement, recommendation, or favoring of The Rand Group or Hightower Advisors, LLC, or any of its affiliates, employees or contractors acting on its behalf.  Hightower Advisors, LLC, does not guarantee the accuracy or safety of any linked site. Hightower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client’s individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor for related questions.

¹Source: BlackRock. “What is a 529 college savings plan?”
²Source: Fidelity.com “How to spend from a 529 college plan.”