529 plan insights: fees, myths and rising college costs

We all want what’s best for our children and grandchildren, and for many families that includes assisting with college costs. Tuition and fees have been rising for decades – at private nonprofit four-year institutions, they’re up about 74% over the past 30 years. That makes tax-advantaged 529 accounts more important than ever, 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. Starting early can help you take full advantage of a 529 – but it’s never too late to start investing in your child’s future,” Solomon said.

First, understand the fees for 529 accounts

Administrative fees, expense ratios and account maintenance fees can add up. You may also owe taxes (and a federal penalty) on earnings withdrawn for nonqualified expenses. Over time, fees can chip away at your progress. Review each plan’s fee schedule and speak to your advisor about before you invest.

Common 529 myths (and what to know instead)

Myth: Financial aid will cover all the college expenses

Not necessarily. Financial aid and scholarships can help pay for college, but grants and scholarships typically cover only a portion of total college costs.

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

Not necessarily. In many cases, you have options. If your child doesn't attend college or doesn’t spend the whole account, you have the flexibility to transfer it to another family member.

Other options include:

In some cases, you may be able to take a nonqualified withdrawal up to the scholarship amount without the additional 10% federal penalty, though taxes may still apply to any earnings you withdraw. You may also be able to roll over up to $35,000 (lifetime limit) from a 529 to a Roth IRA for the beneficiary, subject to specific requirements (including annual Roth IRA contribution limits and account age rules). Contributions made in the prior five years generally aren’t eligible for rollover.

Myth: You have to live in the state where you choose the plan

Not true. You can generally invest in another state's 529 plan – for example, you could invest in California’s 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 home state's plan.

How a 529 can help amid rising education costs

529 plans can be a powerful way for families to save for college. As long as funds are used for qualified education expenses, earnings can grow tax-free – and that growth can add up over time.

For instance, if you have a newborn today, in 18 years, school is expected to cost $474,868 for public out-of-state college, and $631,913 for private college (including tuition, fees and room and board). That’s a big number to swallow, but by starting to put money into your 529 now, rather than waiting, you’ll give your savings more time to grow.

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