What is a 529 college savings plan and how can it solve the student loan crisis? What are the pros and cons of this rarely used and misunderstood investing tool?
In this video, I’ll show you why most people can benefit from a 529 plan, even those without children. I’ll reveal the benefits of these rarely used accounts that can will drive you to your financial future and save money on taxes.
The Student Loan Crisis in America
Nation, there is a student loan crisis in America! More than $1.6 trillion is owed in student debt. The average student loan debt is over $37,000 and means a monthly payment of $382 even on a low 4% rate. That means you’re out $400 a month, every month for the next 10 years!
More than the numbers though, this is a crisis for an entire generation. Home ownership among people 25 to 34 years old has plunged 10% from 2005 to 20017. That ten-percent means 1.3 million millennials aren’t able to realize that American dream.
Worse still, the percentage of millennials living with their parents has nearly doubled to 22% since 2000. That’s an additional five million young adults that have found, they aren’t able to pay the bills because of these debts.
Student loan debt is a weight on the financial future of an entire generation!
How 529 Plans can Solve the Student Debt Crisis
There is a solution though and I’m guessing you already know what it is, the 529 College Savings Plan.
These special investing accounts are a little-known strategy that not only helps save for college but is also going to save you money on your taxes.
But the sorry fact though is that only about two-in-ten kids have a 529 plan and only about two-thirds of adults even know what these are.
That’s why I wanted to do this video. In partnership with the UNest App, I’ll explain the 529 college savings plan, show you the pros and cons and then answer the seven most common questions I hear. I’ll also reveal how you can use a loophole in these special accounts to drive to your own financial future, not your kids and not your grandkids, but how you can get a big tax benefit for yourself as well.
It’s going to be a complete guide to 529 savings plans!
The UNest App is operated by UNest, an SEC registered investment advisor, that helps you set up and manage your 529 plan. Open your account and UNest will help you pick the right investments depending on how long until you’ll be needing that money for expenses.
What I like about the app though is its transparency in pricing. You pay just $3 a month for accounts under fifty-grand with no sales commissions and investment fees on funds are about half you’d pay with an advisor. It’s combining all the ease of an online advisor with the low-cost and benefits of a 529 so I’ll show you how the app works in a bit.
What is a 529 College Savings Plan?
First the basics and what is a 529 savings plan before we get to those pros and cons and why I say EVERYONE should set up a 529.
A 529 college savings plan is a little mis-named. They’re not really savings accounts and they can be used for more than just college.
529 plans are special investment accounts set up by states. They’re similar to your 401K plan in that an investment firm is contracted to run the plan and offer investment options. You invest in these with after-tax money but it grows and all your withdrawals are tax-free if you use them to pay for approved educational expenses.
Now I know it’s a lot so let’s just take some important chunks of that separately to make it a little less confusing.
529 plans are…an investment account you set up with the state, so these are generally well managed with professional investment firms. You invest after-tax income, so unlike your retirement accounts, you don’t get that instant tax break but, all your money grows tax-free and your withdrawals are tax-free if used to pay for qualified educational expenses. And that’s really one of the biggest misconceptions. These aren’t just college savings plans. You can use that money to pay K through 12 costs, public and private schools, community college and even vocational training.
So you see, these plans give you a great way to never pay taxes on some of your investment returns and pay for things you’re going to have to pay for anyway.
Pros and Cons of a 529 Plan
Real quick, the pros and the cons here because I want to get to those questions I know you all have. A lot of the benefits, we’ve already hit on including tax-free returns at the federal and sometimes the state-level. So you won’t pay capital gains taxes on the investments in your account and a lot of states have the plans set up where you won’t owe state taxes as well.
These are really a low-stress investment option. Most plans have a few types of funds you can choose from; some options like target-date funds and other asset funds, but it’s not the drink-from-the-firehose selection you deal with in the market. Just pick a few funds and put your money to work.
529 plans are extremely flexible. Money in one plan can be rolled over into another. You name a beneficiary to use the funds but you can change it or even name yourself.
You know what we say here in the nation, it’s not all rainbows and unicorns though. Cons include a 10% penalty you’ll pay if the money doesn’t go to approved educational expenses. The limited choice of investment funds is also sometimes a downer, but you can always switch to another state’s plan. Fees in these things can be pretty high as well. A study of 56 plans found annual account fees ranged from zero to $35 and other expenses were as high as $1,370 over ten years on a $10,000 account.
The UNest App invests through the Illinois Bright Directions 529 program, one of the best 529 plans I’ve seen. The program gives you access to ten-plus fund providers including Vanguard and T Rowe Price funds.
The app charges a $3 monthly account fee but there are no sales commissions and the funds are passively managed so expense ratios are lower. When you start on the App, you’ll provide the name and age of the plan beneficiary which helps you choose the funds right for your plan.
Your money will grow tax-free in the plan and you can save more anytime you like. When you need to pay for educational expenses, UNest can send the funds directly to the school, making it all super-easy.
UNest is one of the most cost-efficient advisor-guided plans in the nation with that flat-fee pricing and no commissions so check that out and compare it before you pick a plan.
Now I want to cover the seven most common questions I get about 529 college savings plans because these are really great ways to save but also so misunderstood.
How do I Choose a 529 Plan?
First here is just, How do I choose a 529 plan?
There are a few things you want to consider when deciding on which plan you use. These include any in-state tax benefits, so if your state offers a tax break on contributions to the in-state or even out-of-state plans.
Check out the service provider of the plan, what’s the customer service like and what kind of services do you get with the plan.
You’ll also want to look at the investment options; what kind of funds are available and then what are the fees and expenses on the plan.
What Schools can I use 529 Money at?
Probably the most frequent question I get is, Does my child have to attend a school in the same state?
This is an easy one. You can invest in any state’s 529 plan and use that money for any school approved by the Department of Education. And that’s actually a lot more than people realize, including not just public and private colleges but vocational schools and community colleges. There’s no restriction on using a specific school on any 529 plan.
How Do I Open a 529 Account?
Once you’ve decided on a 529 plan, the next question is usually, How do I open a 529 college savings account?
The easy way is to use the link in the description, open an account on the UNest app and they’ll help take care of the rest.
The other option is to look at the individual state plans. Just about every state has at least one and they differ in fees and investment choices. Of course, if your state offers a tax-credit or deduction for using that state’s plan, then that’s usually a pretty easy choice but make sure you still compare the fees because a plan with higher fees can eat up all the benefit you get from the tax deduction.
To open a 529 college savings plan, you’ll usually just need your social security number, the beneficiary’s date of birth and social security number and your bank account information to link up the accounts for deposits.
How Do I Invest in a 529 Savings Plan?
Another frequent one here, How do I invest in my 529 Plan?
Setting up your account, you’ll pick the investment funds you want to use for the money. Choices generally include a target-date fund which invests in stocks and bonds depending on how much time is left to college-age. They’ll also be regular stock and bond funds to give you more freedom to choose.
You can invest in one or several of these, separate your money however you choose, and then any money you deposit will automatically be invested.
You’ll get a quarterly statement as well as an annual report on your account.
What Happens if I Don't Need 529 Money?
So what if you end up not needing the money, What happens if your kid doesn’t attend college or gets a scholarship?
This is actually two questions because there’s a different answer for each.
If the account beneficiary gets a scholarship, you’re allowed to take the amount of the scholarship out of your 529 plan without paying the penalty though you’ll still owe taxes on your returns.
If they don’t need the money because they don’t go to college or any of those other approved educational programs, that’s another matter.
Here you have two choices; you can take the money back out of the plan or you can just name someone else to use it. Understand that withdrawing the money means you’ll likely pay that 10% penalty plus taxes on any of your returns.
It’s super easy to just name someone else to use the money though and this can be anyone related to the original beneficiary including siblings, parents, their own children, spouses or even in-laws and cousins.
What are the Fees in a 529 College Savings Plan?
An important question here, What are the fees and expenses in 529 plans?
This is one of the most important points you need to watch when you’re trying to find a 529 plan, whether it’s the one provided by your state or another. Annual account fees run as high as $35 on some plans and some will even charge you a commission on each time you invest, something called a load fee.
All of these plans invest through funds, so there will also be an annual expense ratio on the amount of money you have in each fund. This usually ranges from about a tenth of a percent up to one percent or more for mutual funds and if that doesn’t seem like a lot, just a half percent difference can mean $2,200 less over 18 years on a $10,000 account.
So any plan you look at, make sure you compare all the fees and expenses including any annual account fee, commissions each time you buy or sell investments and the expense ratio on available funds.
How Much to Invest in a 529 Plan?
Another question I get a lot is, How much can I put in a 529 plan?
Maximum contributions to a 529 plan are set by each state but it can be as high as $380,000 so not something most people will have to worry about. Now the annual amount is something you have to watch because each parent can only contribute up to $15,000 a year or you might have to pay what’s called a gift tax. You can also superfund your account with a one-time contribution up to $75,000 per parent that funds the account over the next five years and still avoid the gift tax.
College savings plans can help your child avoid the student loan crisis and give you a tax break. It's one of the best investments I've ever made.