529s: All the latest insights

We all want what’s best for our children and grandchildren, and for many families, that includes assisting with college costs. You already know college expenses are rising, but are you aware they’ve increased approximately 80% over the past 30 years? This continued increase in tuition costs make tax-advantaged 529 accounts more crucial than ever before, says Darlene Solomon, Executive Director of Solutions & Advice for J.P. Morgan Wealth Management.

“Having a plan to pay for college is an important part of your family’s financial health. It’s important to start early to take full advantage of your 529, but it’s also never too late to start investing in your child’s future,” Solomon explains.

First, be sure you understand the fees for 529 accounts

Administrative fees, expense ratios and account maintenance fees can add up. You can also be taxed on a non-qualified withdrawal. Fees can add up over time and chip away at your goal. Be sure to do your homework and speak to your advisor about each plan before diving in.

Let’s dive into some 529 myths, and bust them together

1. Financial aid will cover all of the college expenses.

Financial aid or a scholarship can be a wonderful way to help pay for college, but only 0.1% of students receive enough grant and scholarship money to cover tuition 100%.

2. You’ll lose money if your child doesn’t go to college or gets a scholarship.

Not true. The money is yours, no matter where life leads. If your child doesn't attend college or didn't spend the whole account, you have the flexibility to transfer it to another family member. Other options include using funds for private K–12 school, keeping the account in the original beneficiary’s name so money can go toward college later in life, use the funds to pay for vocational school or making a non-qualified withdrawal with its 10% penalty fee and taxes on investment gains (the money you put in is never taxed or penalized when withdrawn).  And that scholarship? You could use a 529 plan to pay qualified expenses not covered by the scholarship.

You can also make non-qualified withdrawals equal to the scholarship amount without penalties, though income taxes would still apply to any earnings you withdraw. You also have the option to roll over up to $35,000 (lifetime limit) into a Roth IRA for the 529 account beneficiary. However, you can only contribute up to the annual threshold for a Roth IRA in a given year, and your account must be open at least 15 years. Contributions made during the prior five years are not eligible for rollover.

3. You have to live in the state where you choose the plan.

Actually, great news – you can choose to invest in nearly any state's 529 plan. For example, you can invest in California’s 529 plan even if you live in Nebraska. Keep in mind that many states do offer additional tax benefits, such as state income tax deductions, for residents who contribute to their state's plan.

The latest college costs are staggering … a 529 may be a great plan of action

529s can be a powerful way for families to save for college. This is because you don’t need to pay taxes on gains as long as you use the funds for qualified education expenses, you get to keep 100% of the investment growth – and those extra dollars can really add up.

For instance, If you have a newborn today, in 18 years, school is expected to cost (including room and board, supplies and tuition) $457,338 for public college, and $607,848 for private.That’s a big number to swallow, but by starting to put money into your 529 now, rather than waiting, you’ll be on more solid ground in 18 years and your loved one’s future will be that much brighter.

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