Beyond Bulls & Bears

Education

Decision made: Why 529 plans are a popular choice for education savings

For families saving for college, 529 plans remain popular. Our Bill Cass shares some key facts about 529 plans.

A 529 savings plan has remained popular among families with college-bound children. In fact, the number of accounts has continued to grow steadily over time, reaching 16 million at the end of last year.

As of June 2023, assets in 529 plans rose to $470.2 billion, according to the College Savings Plan Network. The average account size climbed to $27,741 in 2023 from $13,188 in 2009.1

Reflecting on “529,” here are some key facts for families to consider about 529 plans.

5: Top five benefits

Tax advantages

You pay no federal income taxes on account earnings while the account is invested. And you will pay no federal income taxes when the money is withdrawn to pay for qualified education expenses.

Control of account

You control the account, even when the child reaches legal age. As account owner, you retain control over withdrawals for the life of the account. In most cases, contributions to the account can be removed from your estate for tax purposes, yet you can retain control over the assets.

No income or time limits on contributions

Unlike certain accounts, such as Roth IRAs, anyone can contribute to a 529 regardless of their income. There is no age or time limit on contributions, unlike some custodial accounts.

Age or enrollment-date investment options

Savers have investment options such as age-based strategies that are actively managed and become more conservative as a child approaches college enrollment age.

Special gift exclusion

A special exclusion enables you to make up to five years’ worth of gifts in a single year to a single beneficiary without triggering the federal gift tax.

2: Two biggest myths

I won’t be eligible for financial aid if I own a 529 plan.

Actually, 529 plans are treated quite favorably when a student is applying for financial aid and the student aid index is being calculated.

As an asset, 529 plan funds count as a small percentage of parental assets versus other types of savings accounts, such as a custodial account for a minor.

When paying for college, 529 plan distributions from a parent-owned account are not factored as part of the income calculation for the Free Application for Federal Student Aid (FAFSA).

I may have to pay a penalty and taxes if there are funds leftover not needed for qualified education expenses.

Some families find they have saved more than their children need for college. Students may graduate early or attend a less expensive program. 529 plans offer several options if you don’t use all the money in the account.

  • Transfer the money to another 529 account (money can be transferred to a sibling or family member in same generation as the original beneficiary)
  • Change ownership to yourself to use for education at any accredited school
  • Take a non-qualified distribution in the name of the child so the tax rate is lower
  • Effective in 2024, transfer up to $35,000 to a Roth IRA.

9: Funds can be used for at least nine qualified expenses

  • Tuition and fees
  • Room and board
  • Wifi
  • Computers
  • Books
  • Certified apprenticeship programs
  • K–12 tuition. Up to $10,000 per year per student may be used to pay for tuition at any public, private, or religious elementary or secondary school
  • Student loan pay back—a lifetime amount of $10,000 may be used to pay back student loans
  • Other college-related costs (required course materials, lab expenses, etc.)

It is important to note that not all states recognize certain expenses as qualified so there may be state tax implications when withdrawals are made.

Seek advice

When considering a new savings plan or changes to your financial plan, it is important to seek advice from a financial advisor familiar with your situation.

Explore Franklin Templeton’s resources and learn how a Franklin Templeton 529 plan can help you invest for your child’s education.

For more information, speak with your financial professional.

WHAT ARE THE RISKS?

All investments involve risk including possible loss of principal. Diversification does not guarantee a profit or protect against a loss.

Investors should carefully consider the 529 plan’s investment goals, risks, charges and expenses before investing. To obtain the Program Description, which contains this and other information, talk to your financial professional or call Franklin Distributors, LLC, the manager and underwriter for the 529 plan at (800) DIAL BEN/342-5236 or visit franklintempleton.com. You should read the Program Description carefully before investing and consider whether your, or the beneficiary’s, home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in its qualified tuition program.

Franklin Templeton’s 529 College Savings Plan is offered and administered by the New Jersey Higher Education Student Assistance Authority (HESAA); managed and distributed by Franklin Distributors, LLC, an affiliate of Franklin Resources, Inc., which operates as Franklin Templeton.

Investments in Franklin Templeton’s 529 College Savings Plan are not insured by the FDIC or any other government agency and are not deposits or other obligations of any depository institution. Investments are not guaranteed by the State of New Jersey, Franklin Templeton, or its affiliates and are subject to risks, including loss of principal amount invested. Investing in the plan does not guarantee admission to any particular primary, secondary school or college, or sufficient funds for primary, secondary school or college.

Franklin Templeton, its affiliates, and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax professional.

This material has been provided for informational purposes only and should not be construed as investment advice or a recommendation of any particular investment product, or strategy.

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

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Issued in the U.S.: Franklin Resources, Inc. and its subsidiaries offer investment management services through multiple investment advisers registered with the SEC. Franklin Distributors, LLC and Putnam Retail Management LP, members FINRA/SIPC, are Franklin Templeton broker/dealers, which provide registered representative services. Franklin Templeton, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com.

© 2024 Franklin Distributors, LLC. Member FINRA/SI

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1. Source: College Savings Plans Network, 2024 (data as of 2023).

 

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