529 Plans

Starting a 529 plan can be an important tool as you focus on your family’s overall financial future. Setting up a 529 plan for your children can help you create a solid foundation for their education and help you reach one of your financial goals.

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What is a 529 plan?

A 529 plan is an education savings plan sponsored by a state and can be used for education expenses. These plans are tax-advantaged and money contributed to them can be invested for example in mutual funds and exchange-traded funds, to allow for potential growth over time. As with any investment, a 529 plan will experience market changes that may affect its worth when it is redeemed. 

Compared with other education savings vehicles, a 529 can offer more flexibility and better control for the account owner. For the beneficiary, this plan may be able to offset some or all of what they would have had to take out in student loan debt.

There are no age limits for who is eligible to be a beneficiary of a 529 plan. The account owner sets up the account for one beneficiary. If the named beneficiary decides not to attend the school, the account owner can change the beneficiary to another eligible family member.

In addition to the account owner, anyone is able to contribute to the account. This includes grandparents, family friends, parents and others, regardless of their income. Contribution limits will vary according to each state’s plan.

What to look for in a 529 plan

To get the most benefit from a 529 education savings plan, make sure it includes these aspects:

  • Investment principles of quality and diversification
  • Asset allocation that aligns with:
    • Return objectives
    • Risk tolerance
    • Time horizon of the education savings goal
  • A rebalancing strategy to help ensure asset allocation continues to align with return and risk objectives

529 prepaid tuition plans

A 529 prepaid tuition plan is a contract that can be purchased based on the current tuition rate of an eligible public or private college or university within a certain state. The amounts of tuition can be paid as a lump sum or installed payments and offer options for two- to four-year undergraduate programs or graduate school. In some cases, the contract can be a combination ranging from one to five years of tuition. A number of states offer a guarantee to keep prepaid plan amounts in pace with tuition costs or promised financial assistance if the program experiences a funding challenge. Since these plans are state sponsored, either the account holder or the beneficiary may need be a resident for plan eligibility. Prepaid tuition plans are primarily designed to offset tuition costs, so any related costs, such as housing, may need to be covered outside of the plan.

529 education savings plans

A 529 education savings plan is a state-sponsored investment account that can be used toward elementary, secondary (in some states) or higher education expenses, including many colleges, universities, trade schools and for apprenticeships, for the account beneficiary. There are fewer restrictions for residency with many states offering 529 savings plans to out-of-state residents. These plans also allow contributions to be used for other costs, in addition to tuition savings. 

The chart below shows how starting early and then incorporating just a portion of a typical daycare bill can grow to be sizable education savings amount over time.

 Cost of Attendance per Year

Source: Edward Jones

This graph shows the amount you save each month and when you start saving for a child can make a real difference. The green line shows you'll accumulate $23,000 if you put aside $100 per month for a child from age 5 to age 18. The blue line shows you'll accumulate $38,000 if you put aside $100 per month starting at birth through age 18. The red lines show you'll accumulate $105,000 if you put aside an additional $300 per month from age 5 to age 18. Calculations assume saving $100 a month until the child reaches age 18, with an annual rate of return of 7% until age 10, 6% from ages 10 to 16, and 3% thereafter. Numbers rounded to nearest thousand. This graph is for illustrative purposes only and does not represent any currently available investments.

Contributions from friends and other relatives

When contributions are made by friends or other family members, these are considered gifts from each person. These gift contribution amounts won’t affect the gifting limits of the parents or the plan’s account owner unless they are also the beneficiary. This offers others who want to contribute the option of giving to an existing 529 plan account they do not own or establishing an account to retain ownership. Gift contributions to 529 plans will count toward the annual gifting limit.

Accelerated giving provisions

Grandparents or other close relatives and friends can also choose to contribute up to five years of gifts in a single year. That amount would not be generally considered as part of an estate for federal estate tax purposes. This superfunding contribution does not incur gift taxes for the current year and the next four years. Any additional annual contributions within that same five years would count against the lifetime gift exemption and could be taxable if the donor has used their entire lifetime gift tax exclusion. However, if a donor dies before the five-year period has ended, only a portion of the contribution is considered a completed gift. The remaining amount will be added back to the donor’s estate and subject to any taxes.

Find your state’s 529 plan

There are different resources available to help you learn more about your home state’s 529 education savings plan and those offered by other states. This is an optimal time to consider how a 529 plan can work with your other savings goals. Your financial advisor can work with you to help you navigate this process.

Keep in mind, as a 529 education savings plan account owner, you may also be eligible for other potential state benefits These may include eligibility for financial aid and scholarship funds, as well as protecting the savings plan from being used to pay creditors in the result of bankruptcy or legal judgment.

How 529 plans impact financial aid

A 529 education savings plan is considered a parental asset, whether it is owned by the parent or the child. That means it should have a relatively low impact on a student's financial aid, but it is a good idea to talk with the college’s financial aid office well ahead of the time when your child will start attending school.

It may also be useful to learn what kind of financial aid is available from federal, state, local and private funding. Visit the U.S. Department of Education’s Federal Student Aid site to start your financial aid research. It has all necessary forms, including the Free Application for Federal Student Aid (FAFSA). You can also read about the qualification criteria used for financial aid calculations.

Additional qualified uses

New laws have been put in place that expand the potential qualified uses of 529 plans. Distributions can be used to pay for up to $10,000 a year per beneficiary for elementary and secondary school (public, private and religious) tuition expenses, which are not subject to federal income tax. Plans can also pay for qualified costs associated with apprenticeship programs. Eligible programs can be offered through trade schools and community colleges and must be registered with the U.S. Department of Labor. In addition, 529 plans can help repay certain student loans, up to a $10,000 limit.

Enhanced flexibility for unused 529 assets

A common question that arises when parents think about setting up a 529 account is, "What if my child doesn't end up going to college?" A recently passed piece of legislation known as the Secure 2.0 Act may help provide some enhanced flexibility to those who encounter this situation. Beginning in 2024, 529 account owners can roll over unused 529 assets to a Roth IRA for the beneficiary, subject to certain criteria and limitations.

For important details on the changes, criteria, limitations and what the new legislation could mean for you, please see our Secure Act 2.0 page.

How to get started

Our Edward Jones financial advisors continue to work with clients on their evolving financial priorities, including saving for education.In 2020, the firm was ranked number 1 in the U.S. in 529 plan funding.

Trying to understand and plan for future education costs can seem overwhelming and confusing. Your Edward Jones financial advisor can work with you to review your overall financial strategy and determine how to reach all of your family’s saving goals, including education.

Contact your Edward Jones financial advisor or find one today!

Kyle Harpin, CFA®, CFP®

Kyle Harpin is an analyst on the Client Needs Research team, which creates advice and guidance related to preparing for retirement, living in retirement, saving for education, estate planning considerations and protecting financial goals.

Kyle graduated summa cum laude from the W.P. Carey School of Business at Arizona State University with a bachelor’s degree in finance. He is a CFA® charter-holder and a member of the CFA Institute and the CFA Society of Nevada. Kyle also holds the CFP® designation.

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Important information:

1If you live in a state that does not recognize the expanded use of 529 plan funds and will be required to adopt additional legislation regarding its 529 plan and state income tax incentives, and you withdraw funds before those states recognize the use of 529 plan funds for elementary or secondary school tuition, you may risk having to repay a state tax deduction you've already received, may face state taxes on the investment gains in the account and/or may incur additional penalties. Tax issues for 529 plans can be complex, so we recommend you consult a qualified tax advisor regarding your situation.

Withdrawals used for expenses other than qualified education expenses may be subject to federal and state taxes, plus a 10% penalty on the earnings portion of the distribution. State tax incentives and additional benefits may be available to in-state residents who invest in their home state’s 529 plans. Student and parental assets and income are considered when applying for financial aid. Generally, a 529 plan is considered an asset of the parent, which may be an advantage, in terms of receiving financial aid, compared to building savings in the student’s name. Make sure you discuss the potential financial aid impacts with a financial aid professional. This content should not be depended upon for other than broadly informational purposes.

Please consult your tax advisor about your situation. Edward Jones, its financial advisors and employees cannot provide tax or legal advice.

Edward Jones receives payments known as revenue sharing from certain mutual fund companies, 529 plan program managers and insurance companies (collectively referred to as “product partners”). For more information, see Revenue Sharing Disclosure.

2 2022 amount.