Investment advice: All about 529 plans, just in time for National College Savings Day on May 29

(published in Asheville Citizen-Times, May 23, 2021)

I’m at the age where many of my old college friends now have kids who are headed off to college themselves. If you can tell me where all the time has gone, I’d appreciate it.

Recently, one of these friends’ sons surprised me by theatrically announcing his plans in a “college reveal video” sent around to friends and family. In the video, this smart, engaging and compassionate young man divulged that he is headed to a large university in the Pacific Northwest to study environmental sustainability — and I couldn’t be happier for him and his parents.

But even though their son is receiving scholarships and financial aid, I’m well aware that significant costs can still arise in higher education. So, being a somewhat nosy person — and because we’ve been friends for more than 25 years — I asked my friend if he had set up a 529 college savings account for his son.

“Absolutely! We did,” he replied. In fact, he and his spouse opened the 529 account right after their son was born — a smart move, and one that prompted me to dedicate a column to 529 plans, using the real advice from this one family’s success story.

Just to make sure we’re all up to speed and on the same page: A 529 plan is an education savings account that can be established for anyone by anyone, but it is most often set up by parents and grandparents interested in funding education for their children or grandchildren. The number 529 comes from part of the tax code where this provision lives. And, in case it’s not on your calendar just yet, May 29 is National College Savings Day. (Get it? Fifth month, 29th day. Clever.)

Earnings in 529 plans are not subject to federal tax and, in most cases, state tax as well, as long as withdrawals are used for qualified education expenses like tuition, room and board, books and a computer. Though these plans are often set up for another individual, the account owner retains full control over both the assets and disbursement of the funds.

There are no age limits on beneficiaries or contributors, and no income limits on contributors. And, unlike some other college savings plans, 529 plans allow contributors to invest from any state — regardless of whether the beneficiary lives in or plans to attend school in that state.

Additionally, since 2017, federal legislation has expanded 529 qualified expenses to include up to $10,000 annually for K-12 tuition or for costs associated with registered and credited apprenticeship programs. These plans now also offer a lifetime maximum of $10,000 to pay off qualified student loans for a beneficiary or their siblings.

I’ll say it: 529 plans are great vehicles for education savings. But don’t take it take from me. Take it from my friend whose son is headed to college this fall. He said he always advocates 529 plans to new parents, because these plans spare families the anxiety of skyrocketing college costs down the road.

He then shared the following tips, approved and expanded upon by your friendly neighborhood financial advisor, which he attributes to the success of his son’s plan:

• Don’t just save, invest. While 529 plans offer short-term cash savings in money market instruments, consider making investments with more growth potential. College target date portfolios, like my friend’s family chose for their son, are more growth-oriented at the start while the child is young. Then, as the child approaches his or her expected enrollment year, the accounts become more preservation-oriented to minimize market volatility. He viewed this as a “set it and forget it” strategy that has worked well over time. Keep in mind that regulations allow no more than two investment strategy changes per year.
• Start early. The sooner you start investing, the more time you have to grow your fund through the power of long-term compounding. My friend opened a 529 account just after his son was born — and some 18 years later, it has a healthy balance due to compounding.
• Set up automatic monthly contributions. Regular, monthly contributions over time topped the list for my friend as the biggest factor in his plan’s success.
• Let family and friends contribute. In lieu of expensive toys that his son would soon be bored with, my friend encouraged his child’s grandparents to contribute to the 529 plan for birthdays and holidays.
• Set a goal. Originally, his goal was to cover at least two full years of projected college costs for 2021-2025 — and he’s happy to report that the plan is set to either meet or exceed that goal.
• Take advantage of your state’s income tax deduction, if it has one. Some states offer a tax deduction for contributing to any 529 plan, including out-of-state plans, while other states offer potential tax breaks on contributions made only to in-state plans. In Maryland, my friend was able to take advantage of this, deducting up to $2,500 per year, per beneficiary, from state taxable income. As of 2014, however, North Carolina residents no longer benefit from a state income tax deduction for contributions made to a 529 plan.

Of course, there are other ways to save for college, from Roth IRAs to UTMAs and Coverdell Education Savings accounts. But, in my opinion, the 529 college savings account is the better choice — and I know a proud father with a successful kid who would back me up. “It all worked as we hoped it would,” he said.

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Bray Creech, MBA, CPA is a CERTIFIED FINANCIAL PLANNER™ professional with Joel Adams & Associates with securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC and is located at 545 Merrimon Avenue, Asheville, NC. He can be contacted at 828-251-9700 or bray.creech@raymondjames.com. CPA services are not offered through Raymond James. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Joel Adams & Associates is not a registered broker/dealer and is independent of Raymond James Financial Services, Inc.

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