529 Plans Offer Method to Pay for College

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In-state undergraduate tuition at the Penn State University campus in University Park ranges between $17,416 and $22,484 per year.

Combined with books and fees, housing and other living expenses, that can make a four-year degree there cost upward of $120,000. And that’s at a state-related school. A secondary education at a private university would cost much more, and the price of higher education is only expected to continue rising over the next few decades.

This leaves many parents wondering how they can possibly afford college.

One way to help pay for it is by investing in a 529 plan, a tax-free plan that helps families save money for higher education. 529 plans can only be used to pay for qualified education expenses, such as tuition, books, fees, supplies, and room and board, among other things.

“As a state that ranks No. 1 in the nation in student debt per borrower, the key to saving for higher education expenses is to start small and start as soon as possible,” said Heidi Havens, press secretary at the Pennsylvania Treasury Department. “While it’s never too late, opening a PA 529 account when a child is born means that much less has to be borrowed later.”

Pennsylvania offers two 529 plan options: the Guaranteed Savings Plan (GSP), a lower-risk plan that keeps up with rising tuition costs; and the Investment Plan (IP), which offers 15 investment options from the Vanguard Group. The GSP fund assumes the risk, so there’s no risk of loss. The IP fund carries a risk of loss, but due to its specific nature, many consider it a safe investment.

The special tax advantages of 529 plans make them a unique way to prepare for college. These advantages include a state tax deduction, which allows contributions from Pennsylvania taxable income up to $15,000 per beneficiary per year to be deducted. The plans also have tax-deferred growth and tax-free withdrawals, which allow contributions to be free from both federal and state taxes while in the account, and for the growth to be free from income taxes if used for qualified expenses. In addition, 529 plans have special gift and inheritance tax benefits.

“You get an automatic current state deduction,” EisnerAmper Senior Manager Seth Moskowitz said. “So if you live in Pennsylvania, you automatically get 3 percent. … So you can kind of look at that as an automatic return on your investment. The other side is there is no federal income tax on any of the earnings on the account, so if it’s going to be in the account for a long time, you get the time value savings of all the tax that you would have paid currently on the earnings.”

Havens noted that next month marks the 25th anniversary of PA 529 plans. In that time, she said, tens of thousands of Pennsylvanians have taken advantage of them.

“In fact, since its inception, the PA 529 GSP has paid more than $2.2 billion to cover qualified higher education expenses, while the PA 529 IP has paid more than $914 million to cover qualified higher education expenses,” she said. “Both plans offer a flexible, tax-advantaged way to help families save for the cost of higher education.”

Under the tax bill signed by President Donald Trump in December, 529 plans now can also go toward paying for up to $10,000 per student for qualified kindergarten through 12th-grade education, including at Jewish day schools.

Beginning April 27, there will be several changes to the PA 529 IP, such as an addition of seven portfolios to the three age-based investment options, an increase in international stock and bond allocations, and the inclusion of a new international bond portfolio.

The money in the accounts can go toward a traditional university, many technical and career schools, and qualified expenses. Other people, like grandparents, aunts, uncles and friends, can contribute to the account as well.

But 529 plans come with a risk if the beneficiary does not go to college.

That’s why Daniel Weiss, co-founder of the Tundidor & Weiss Investment Group, recommends clients be cautious about investing in them.

“I tell them to be very careful,” he said. “I say, ‘Look, if you’re going to put $100 a month into a 529 plan, I wouldn’t recommend more than a quarter of it in there and the rest toward some [other] type of investment vehicle.’ That way you can diversify a little bit and have some toward tax-free. … You don’t want to be stuck with $100,000 in a 529 and have your kid not go to college.”

If the child the plan is intended for doesn’t go to college, the beneficiary can be changed at any time, such as to a sibling or grandchild instead.

Taking money out of the 529 plan to go toward a non-education expense is possible, but it will cause the earnings to be taxed and penalized.

“Let’s say you have one kid, and that kid decides to join the Army or decides not to go to college,” Weiss said. “And you put that $100 in, and you take out $150, and it’s not used for educational purposes, you’re going to be paying a 10 percent penalty, as well as taxes.”

If a person does invest in a 529 plan, Weiss said they should start early and invest in small amounts over time.

Uncertainty of the future is one reason why Moskowitz agrees that people might hesitate to invest in a 529 plan. It also ties the money up for a long period of time.

Ultimately, it’s about finding a personal balance, so Moskowitz recommends speaking to a financial adviser about figuring out if investing in a 529 plan is the right decision for you, particularly if you are interested in investing a large amount.

“It’s a matter of maximizing your tax-efficient vehicles based on your goals,” he said, “so it’s probably going to be different for everyone, depending on what their comfort level is regarding the unknown of if someone is actually going to go to college, how much it’s going to cost, all that stuff, versus hopefully you’ll retire someday type deal, and just trying to figure out the balance between those investment vehicles against the amount of disposable income you have.” 

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  1. Informative piece. I find it crazy that the state of Pennsylvania ranks first in the nation in student debt per borrower. Therefore, it is crucial for Pennsylvanians to understand the ins and outs of the 529 tax plan. You did an excellent job explaining in detail how the 529 plan works and some of the benefits; this post expands on your points for those who want to learn more about the plan [https://acuity.co/529-college-savings-plans/].Thanks for sharing, Selah Maya.


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