Section 529 College Savings Plans

Guilderland, NY  – Those interested in saving money towards future higher education expenses are faced with several different options.  Among these options is a Section 529 College Savings Plan, which has emerged over the past 20 years as a popular college savings vehicle.Section 529 College Savings Plans

Section 529 plans are administered by the state in which the plan is offered.  The various plans which are available are similar in the following regards:

  1. A plan is established by an account owner (typically the person who funds the account), with a designated student beneficiary.  The owner and beneficiary can be the same person.
  2. Contributions can be allocated among a number of different investment options offered within the plan.
  3. The account balance grows tax-deferred over time.
  4. If used to pay for qualified higher education expenses for the account beneficiary, withdrawals are made on a federal and state tax-free basis.
  5. The owner may change the account beneficiary, provided the new beneficiary meets certain relationship rules compared to the former beneficiary (i.e. sibling, child, etc.).
  6. If the owner and beneficiary are different, the owner may accelerate up to five years of the annual gift tax exemption (currently $15,000 for 2018) into a single year.  Thus, a single owner could open a 529 savings plan with a named beneficiary and immediately contribute up to $75,000 to the plan without incurring gift tax consequences (please consult your tax advisor for additional information).

Beyond the above, various states have additional potential benefits.  For example, a New York State resident who owns and contributes to a NY Section 529 Savings Plan is eligible for a state income tax deduction of up to $5,000 ($10,000 if married filing jointly) for contributions made during a given year.

New York State offers two Section 529 Savings Plans – the Direct Plan, and the Advisor-Guided Plan.  The Direct Plan contains investments managed by The Vanguard Group and holds approximately $21.6 billion of assets, while the Advisor plan offers investments from JP Morgan Funds and holds approximately $5.3 billion of assets.  The Direct Plan has total administrative and investment costs of 0.16% per year.  The Advisor Plan has total administrative and investment costs which range from 0.40% to 2.11%.  Additionally, Advisor-Guided Plan contributions may be subject to front-end or back-end sales charges.

While the Direct Plan does not require an advisor relationship to establish an account, investors may still wish to consult a Registered Investment Adviser who can provide guidance on the account-opening process and investment selections.  Additionally, would-be 529 plan investors should be aware of the potential impact on financial aid to the beneficiary.

Douglas Bauer, CFP

Douglas Bauer, CFP

Douglas J. Bauer, President and CEO of AllSquare Wealth, began his career in the financial services industry in 1975 and is a Certified Financial Planner (CFP®) practitioner. His primary responsibilities include overseeing the direction of the firm, client development, and the servicing of existing client relationships. As part of assisting clients with their overall wealth management needs, AllSquare Wealth offers income tax preparation services for individuals, estates, trusts, and small businesses.