Here’s Everything You Can Use Your 529 Account For

$334,000; that is approximately how much it will cost to send your newborn to a 4-year private college starting in the year 2030. If you have two children, that future expense comes close to current home prices in Los Angeles. The cost of higher education is rising faster than inflation (including food and energy.) It’s no wonder then that many parents are starting to save early for their children’s college education costs. One of the most efficient investment vehicles to help parents accumulate the necessary funds is the recently introduced 529 plan. Officially known as “Qualified Tuition Programs”, 529 plans are state sponsored tax efficient accounts, created by the IRS, and used to save for college expenses. Unlike most IRS publications/explanations, which leave you scratching your head, the IRS 529 rules are clear and understandable, with significant benefits.

Tax Free, Tax Deductible, & Flexible

One of the best features of the 529 plan is that earnings are tax free as long as they are used to pay for qualified college expenses. Most custodial accounts become the asset of the child upon the age of majority, are irrevocable, and are subject to the kiddie tax. However, 529 plans are owned and fully controlled by the parent – the child/student is simply the beneficiary. The parent can change the beneficiary to any family member, at any time, without penalty; family members include step parents/siblings, nieces/nephews, and even first cousins. In addition, many states offer tax incentives for their residents who contribute to a 529 plan, thus making this college savings’ investment tool even more appealing.

More Than Just Tuition

Money in a 529 plan can be used for college expenses beyond just tuition. Funds can be used to pay for tuition and fees, room and board, books, supplies, and even computer and technology equipment used for educational purposes (including computer, internet access, printer, and software.) As an added bonus, some foreign study abroad programs are also covered under this plan. Bon voyage!

Even the Obamas Agree

Congressional leaders are known for taking care of themselves, whether it is their “Cadillac” health plans, their Thrift Savings Plans, or their generous pensions. So it is no wonder that they would also take advantage of 529 plans to save for college. According to the most recent financial disclosure forms, the Obamas have between $100,001 and $250,000 saved in 529 plans for each of their two children. Presidential candidate Rick Santorum has 25 separate investments in 529 plans for four beneficiaries each worth between $1,001 and $15,000. In this case…Do as they do, not as they say.

Final Thoughts

While 529 plans are state sponsored, it is important to note that funds are not held by the states, nor are they part of a state’s budget. States hire large mutual funds companies to run their 529 plans. This point is relevant because many parents are worried that their child’s college savings will be subject to a state’s budgetary problems and cuts; this is not the case. And lastly, the advice I give all my clients is that while it is nice to help your children with their college education costs, first make sure your own retirement is secure before saving for college. After all, your children can always borrow for college, but you can not borrow for retirement.

 

About the author

Ara Oghoorian, CFA, CFP®
Ara Oghoorian, CFA, CFP®

Ara Oghoorian, CFA, CFP® is the founder and president of ACap Asset Management, Inc, a financial advisory specializing in working with medical professionals. Ara has over 20 years of experience in the financial services industry. Prior to starting ACap, Ara worked for a wealth management firm in the Washington, DC area providing investment management, tax preparation/planning, financial planning, complex risk-management strategies, and financial advice to ultra high net worth individuals and institutional clients.

Ara worked overseas for the US Department of the Treasury as an advisor to the Ministry of Finance and Economy in the Republic of Armenia. He also conducted work in the Republic of Georgia and the Republic of Latvia. He spent nine years at the Federal Reserve Bank of San Francisco auditing foreign and domestic banks and bank holding companies. He began his career at Wells Fargo Bank in Huntington Beach, CA.

Ara earned a Bachelor of Science degree in finance from San Francisco State University, is a Commissioned Bank Examiner through the Federal Reserve Board of Governors, and holds the Chartered Financial Analyst (CFA) designation. Ara also holds the Series 65 license.

3 Comments

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  • Hi Loraine,
    That is a great question. A 529 plan is very easy to open and you can certainly open one on your own at no cost. A financial advisor should only charge you a flat fee if you would like someone to open the account for you and help you select the investments. That fee varies among advisors, but it should be a flat one-time fee.

    If you would like to open a 529 plan on your own, I would recommend you first check your state to see if they offer a tax incentive for opening a plan within your state. If your state does not offer a tax incentive, the following states have some good plans: Utah, Virginia, West Virginia, & Arkansas. Again, first check your home state.

  • Hi Ara,

    What is the usual fee for a broker or financial adviser? I approached Edward Jones to invest in a 529 plan. They recommended American Funds. Their fee is 5.75% of the invested amount and I thought that is a little to steep. Will I be better off doing this on my own? Or do you think there are other financial advisers or brokers with lower fees?

    Thanks,

    Loraine

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