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529s – A Plan that Likes to Celebrate Its Birthday All Month

May is college savings month (529 college savings plan = 5/29 = May 29th … get it?). These are common questions that clients have on the topic and recent changes to be aware of.

#1. I have more than one child that I would like to save for. Should I open one 529 and primarily save through that, or open multiple?

 

529s are a unique product in that they allow only one owner and one beneficiary per account. However, if there are funds leftover from the initial beneficiary, these accounts allow you to change or rename the beneficiary to another person (as long as it’s family, as determined by the state plan).

 

While opening and managing one account is certainly more seamless and efficient, as I have spent more time in the business, our practice has become just as focused on the risks as the opportunities that exist in both investing and financial planning. With this, my perspective has changed over time.

While having one account certainly simplifies starting and managing these accounts, consider the scenario of an untimely death. If the 529 owner were to pass away, the legal outcome of having just one account is that the current beneficiary listed would inherit the whole account, regardless of the intention that the owner eventually had for funding more than one person’s education. For this reason, I recommend setting up individual accounts for each child that you’d like to fund college savings for. You still maintain the flexibility of renaming dollars to another person in the future, but this will allow you to ensure that if you are not here to dictate the funds, all the intended beneficiaries receive some level of inheritance, rather than just one by accident (pun not intended).

 

#2. Can I only use the 529 plan in my state?

 

529 plans are regulated at the state level and so each of the 50 states have their own proprietary plan, and in some cases, states have more than one option. Each plan is managed or sponsored by a mutual fund company. For example, during my time working at Legg Mason Asset Management (now Franklin Templeton) we represented Colorado’s state plan titled “Scholars Choice”. And as an investor, you have the flexibility to shop around and select from the various state options.

 

However, regardless of the state plan that you choose and use, whether your “home state” (where you reside) or another state’s plan, you’ll be able to use those dollars and earnings towards any college within the Continental US, as well as some select international institutions.

 

It’s important to note that some states provide additional benefits that encourage you to use the state plan where you reside (and pay taxes). This is in addition to the tax-deferred growth and tax-free distribution status that a 529 plan can offer. As an example in Connecticut, an individual can write off up to $5000 of contributions in each tax year against their state taxes (up to $10,000 for married couples).

 

#3: What if we save too much and it isn’t used?

 

GAMECHANGER: Beyond the flexibility of changing beneficiaries of the college savings account to other members in the family, last year Congress passed new legislation that makes 529s even more attractive. As part of the Secure Act 2.0, you are now able to transfer up to $30k of 529 account balance to a Roth IRA. There are rules around this, including who the balance can be transferred to in name and how long the account must have been in existence, but this removes some of the pressure of trying to estimate far into the future what type of student your child will grow into and what their academic pursuits will be at that time, if any. This flexibility makes the 529 a hybrid option: saving for college as a main priority and goal, with retirement as a secondary for the person who owns/contributes to the account.

 

#4: BONUS: A wider picture on 529 plans – estate planning with 529s

 

While all of us would love to have this issue, this option may not apply to all. But for those who have parents, grandparents, or extended family members who may be looking for ways to avoid estate taxes, and thus want to remove wealth or assets from their estate, 529s offer a unique opportunity.

 

The Issue: Estate Taxes. If the value of your estate (including the fair market value of your home(s) and the value of the death benefit on any insurance policies) is above Federal or State limits, you could owe estate taxes. While federal and state limits are currently in the seven figures, without new tax laws to extend those limits, starting in 2026 we’ll roll back to the old limits which are much lower than today’s.

 

The need: Find ways to give gifts during your lifetime to avoid passing those assets after your death and having them be taxed by estate taxes.

 

The Opportunity: 529s offer one other unique opportunity in the form of the “Five Year Rule” gifting strategy. Using this special gifting strategy, which exists specifically for these plans, an individual can gift five years forward in just one year. In this scenario, you’re able to give the annual gifting amount (currently $18,000) times five. Put another way, it provides the ability to gift in one year the same contribution that would typically need to be spread across five, if done outside a 529.

 

In this way, you can effectively “gift” away a much higher amount in a shorter period of time if you haven’t had the time to plan ahead for the estate tax. And because of what we know about “time in the market”, and the free gift that having a long-term approach for investing can provide, this can result in much greater growth in savings before the 529 beneficiary reaches college.

 

The 5-year election must be reported on Form 709 for each of the five years. Married couples can double the impact of this strategy for a total of $36k/year x 5 or a total of $180,000 gifted in one year.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.​