Ep.73 – 529 Plans and College Savings

Happy belated #529Day, a day when states try to boost interest and participation in 529 education savings programs with various incentives.

To mark the occasion, we have one of the foremost authorities on 529 plans, Andrea Feirstein, founder and Managing Director at AKF Consulting Group, a leading strategic advisor to public administrators of state investment programs.

Andrea was extremely knowledgeable and we touched on several topics, including:

What is a 529? A tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.

What’s the tax benefit of a 529 plan? Withdrawals for qualified higher education expenses and earnings in the account are not subject to federal income tax and, in most cases, state income tax. Additionally, some states offer residents of the state specific incentives, like the ability to deduct contributions from state income tax or a matching grant.

What does a 529 plan cost? Fees and expenses vary widely from plan to plan and can include start-up fees, maintenance fees, or sales charges. In general, advisor-sold plans cost more than direct-sold plans. The Financial Industry Regulatory Authority (FINRA) has developed a tool to help you compare how these fees and expenses can reduce returns.

What happens if my kid doesn’t go to college? Most states allow you to tap the accounts for other children in the family or even for the parents. Those withdrawals that are not used for qualified higher education expenses will be subject to state and federal income taxes and an additional 10 percent federal tax penalty on earnings.

What has changed with the 2018 tax law? Americans can now withdraw funds tax-free from 529 plans to pay for K-12 tuition and other eligible expenses at private and religious schools, up to $10,000 per year. But there’s a caveat: Not all states will conform to the new federal rules. That means before you pull money, be sure to double check with your state.

Have a money question? Email me here.

Better Off is sponsored by Betterment.

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“Better Off” theme music is by Joel Goodman, www.joelgoodman.com.