Celebrate 529 Day: Should You Open A 529 Savings Account?
No matter what year it is, May 29th (5/29) is always 529 Day — a holiday of sorts meant to celebrate and encourage the use of 529 college savings plans. With that in mind, many states and plan administrators offer extra incentives to get consumers to use their plans on this date. These incentives can include matching funds for opening a 529 plan and adding money as well as 529 plan-inspired sweepstakes and contests.
If you haven’t started saving for college yet but you would love to dive in as soon as you can, you may be wondering whether a 529 plan is right for you. The fact is, 529 college savings plans can be confusing since each state seems to have their own plan or several to choose from, and since the tax benefits for contributing can vary (or not even exist) based on where you live.
Ins And Outs Of 529 College Savings Plans
First off, you should know that 529 college savings plans were created to help families save for college in a tax-advantaged way. These plans are investment accounts that come with tax benefits that vary by state, and those who use them can tap into their funds to pay for college, K-12 tuition at private school, apprenticeship programs and even student loan payments if they choose to do so.
While 529 plans were originally created in 1986, they became considerably more popular when they were added to the Internal Revenue Code around a decade later. According to the Federal Reserve, the way 529 plans were envisioned led to them being sponsored by individual states, and all states currently have one except for Wyoming (but don’t worry – if you’re in Wyoming you can use other states’ plans).
The main benefits of 529 college savings plans are as follows:
- Potential tax benefits in your state: Some states offer tax benefits for contributing to a 529 college savings plan, so make sure to check for perks that apply where you live. For example, the state of Indiana offers a 20% tax credit on the first $5,000 you contribute to a 529 plan each year. This means those who max this benefit out get $1,000 back from the state when they file their taxes each year.
- Money can be invested: You can invest the money in your 529 plan for long-term growth. Many 529 plans use target date funds that dial down risk as your child gets older and closer to college age, yet plenty of other investment options may be available depending on the plan.
- Funds in a 529 plan grow tax-free: Funds in a 529 college savings plan get to grow on a tax-free basis, so you won’t have to pay taxes on gains in your account as they occur.
- The money can be used tax-free for eligible expenses: Funds in a 529 savings plan can be used for eligible college expenses like tuition and fees, on-campus meal plans, and books and supplies. You can also use 529 funds for up to $10,000 per student in tuition at private K-12 schools, or to pay off student loan debt in amounts up to $10,000 per borrower.
Another benefit of these accounts is the fact that anyone can open one and use one. In other words, 529 plans aren’t limited to only parents, and they do not have income caps that limit who can contribute.
Be aware that, while these plans do not have any annual contribution limits, contributions are considered gifts for tax purposes. Fortunately, contributions from grandparents and other relatives in amounts up to $16,000 per year qualify for the annual gift tax exclusion in 2022, per the Internal Revenue Service (IRS).
New Incentives to Celebrate 529 Day
Some states are offering incentives for families who open a 529 college savings plan on 529 Day this year. You can read about all the 529 plan college savings promotions here, but some of the highlights are listed below:
- Florida: The state of Florida is offering a bonus for new Florida 529 Savings Plans opened between now and June 30, 2022. Just open a Florida 529 Savings Plan and you’ll get a $50 bonus right away.
- Indiana: The state of Indiana is hosting a 529 Day contest for their CollegeChoice 529 Savings Plans through May 29th. All you have to do is complete an online entry form and share a picture of who you’re saving for to get the chance to win a $529 contribution to your account.
- Nevada: The USAA® 529 Education Savings Plan, brought to you by Victory Capital and administered by the State of Nevada, is offering two potential bonuses — a $100 “investment bonus” with a $50 initial deposit and a $50 monthly automatic investment plan, and a $100 referral bonus (up to $500 total) when referring family or friends.
- Ohio: Ohio’s CollegeAdvantage 529 savings plan is once again hosting their College Savings Grand Slam sweepstakes alongside the Cincinnati Reds. The lucky winner of this contest will receive a $10,000 College Savings Award toward their 529 savings plan.
Outside of the state plans, Backer – the 529 plan robo-advisor – is launching Backer Boosts, which will automatically add a $529 boost to your account when you open a new account and make $25 monthly contributions. This boost will help you start earning in your 529 plan right away! Over time, your regular contributions will cover the boost but you will still get to keep all of the extra money you earn from that bigger initial investment.
The Bottom Line
With the sky-high prices of higher education not expected to come down anytime soon, saving for college is probably a smart move. After all, having some money stashed in a 529 plan can help you keep student loan debt at a minimum while increasing your flexibility when it comes to college choice.
That said, you’ll have to do some digging to find the right 529 college savings plan for your needs. Make sure to look at plans offered through your state first, and don’t forget to check for potential tax breaks, fees charged to administrate plans, and minimum contribution requirements.
Also make sure to compare plans based on the investment options they offer, which may include index funds, target date funds, exchange-traded funds (ETFs), or even FDIC-insured investment funds. At the end of the day, the right 529 plan for you is the one that lets you maximize your savings for college with the lowest amount in fees required.