• College Planning

3 Things You Didn’t Know About 529 College Savings Plans

August 19, 2016 | Personal Capital
KEY POINTS
  • Why the 529 plan is the gold standard for college savings.
  • You can always change the beneficiary on the account in case your kids don’t need the funds.
  • Pay for books, computers, and other fees – all from the 529 too.

College is expensive. And that’s likely to be a headline in any newspaper you open this time of year. Today’s smart parents are learning to save early and often to cover these rising costs. And for most, the savings vehicle of choice is a 529 plan, named for the section of the IRS code that created it.

A 529 is the gold standard when it comes to college savings plans for good reason. The amount invested in a 529 grows free of federal income taxes and, depending on where you live and what plan you choose, can provide a state tax write-off too. In exchange for those tax advantages, you have to follow the rules set out for 529 plans, but those rules are more flexible than you might think.

Got a child that will be college-bound some day and ready for the 411 on 529s? Read on for important tips:

1. You Can Change Who Gets The 529 Money

Let’s say you opened a 529 for your first-born, Sally, and dutifully saved thousands of dollars for her education. But then Sally turned out to be a golf prodigy and earned a full ride to college on a golf scholarship. Congratulations to Sally! But what happens to the money in Sally’s 529 account? Pulling money out of a 529 account for something other than a qualified educational expense will cause a tax event.

The good news is that money left in a 529 can be transferred to Sally’s younger brother, Johnny, and his 529 account, and then you can use it for his college expenses instead. But there’s more good news. Johnny turned out to be the National Spelling Bee champion and will be attending college on a full-ride academic scholarship. Now what?

Again, Johnny’s 529 money can be transferred to a younger sibling, and when you’re out of siblings it can be transferred to another one of your family members (think a niece, nephew, aunt, uncle, husband, or wife). Alternatively, you can make yourself the beneficiary and save the 529 for any future grandkids. Finally, you even have the option to use that money to attend college yourself, which you may want to do since you have all that extra time with your now empty nest!

2. You Can Use A 529 For More Than Tuition

If you’re considering opening a 529 account, there’s no doubt you’re saving to cover that scariest college expense: tuition. And that’s smart because according to the U.S. News & World Report, “the cost of a higher education has more than doubled, when adjusted for inflation, since 1986 – faster than the cost of health care, and well ahead of the median family income.”

But a 529 account can be used to pay for more than just tuition. Other college expenses are fair game too, including fees, books, and or a computer if the college requires it. And then there’s that other big expense that sometimes gets overshadowed by tuition: room and board.

Lucky for you, a 529 can be used to pay on campus room and board, and off campus room and board up to the amount of the college’s room and board allowance (the school’s financial aid office can give you that number). An off campus allowance is something to keep in mind, especially for upper class students who trade their dorms and college meal plans for apartments or rental houses.

3. You Can Move Your Child’s Graduation Year To Suit Your Investment Style

When you invest in a 529, you’ll probably be asked what year your child (or the person you’re opening the account for) will be graduating from high school. That information is used so the mix of investments will be appropriate for your time frame (aggressive if your child is very young, getting progressively more conservative as college draws near).

Usually, that’s a good idea. You don’t want to have your child’s college money invested only in equities during his or her senior year of high school and then see the market tank just when you’re going to need it. Alternatively, you don’t want that money in all cash while your baby is still in diapers – you want to take advantage of the growth potential of the market while you still have time to recover any losses.

There may be times, however, when you want your 529 invested just a bit more aggressively or conservatively than the mix that’s been chosen for you by the company you’re investing with. That can be especially true for those in between years, when the investing mix is less of a no brainer. If that’s the case, you might want to invest your 529 according to a college year that is farther in the future (for a more aggressive position) or closer (for a more conservative one) than your child’s actual graduation year. Just remember to review your investments often to make sure the mix is still appropriate for your circumstances.

Whether your child is barely crawling or they’re halfway through high school, the most important component to good college preparation is planning. Remember to try the Personal Capital app to track all of your financial accounts, including a 529 plan.

This article was previously published on September 9, 2015, and has been updated.

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