As most of you know, we welcomed our first child, Charlotte, to the family in July. At Maine General, we learned all about newborn care: feeding, diaper changing, swaddling… the tasks that have consumed most of my days lately! One nurse, however, asked us to consider something in the more distant future: Charlotte’s college education.
This is because every child born in Maine receives a $500 grant from the Alfond Scholarship Foundation for future college expenses. The grant is invested in a 529 college savings plan: an investment account that incentivizes saving for education. My days as a new mom are long and Charlotte leaving for college feels like a lifetime away. But as a planner and investor, I know that saving early makes a huge difference and I’m excited to get started.
I wanted to use this month’s blog to briefly describe 529s and share some lesser-known facts about them.
Here’s how a 529 account works:
The account owner (typically a parent or grandparent) funds the account and has ultimate control of the funds. They’re responsible for naming a beneficiary and deciding how funds will be invested. Contributions then have the potential to grow tax-deferred. When it’s time to pay “qualified higher education expenses,” funds may be withdrawn tax-free.
“Qualified higher education expenses” include tuition, room & board, books, etc. If the student lives off campus, their housing cost, up to the stated costs of the school’s room & board, can be considered a qualified expense.
529s aren’t just for college and grad school; up to $10,000 per year may be withdrawn tax-free for qualified K-12 expenses. You can also use a 529 to pay for community college and vocational schools. Additionally, an increasing number of students are opting for online education, and that shift has only accelerated due to Covid-19. The good news: 529 funds may be used to pay for many accredited online schools.
We’re often asked, “what if my grandchild gets a scholarship? Or decides not to attend college?” As the account owner, you may name a new beneficiary. Generally, this can be anyone related to the original beneficiary by blood, marriage, or adoption. And there is no age limit… if an adult in your family decides to go back to school, you could name them as a beneficiary. (If 529 funds are not needed for educational expenses, they may be withdrawn but subject to taxes and penalties.)
Like all investment accounts, the asset allocation depends on many factors and I recommend working with an advisor on specific allocations. However, similar to retirement accounts, 529s should be invested more conservatively the closer you are to making withdrawals.
Contributing to a 529 for your “future student” can make for a meaningful, financially-savvy gift. While schools may look and operate a bit differently these days, getting an education will always be important to your child or grandchild’s future.
Content in this material is for general information only and 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 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.