529 Day: A reminder to talk to clients about saving for a child’s education

National 529 Day on May 29 (of course) is a reminder of the importance of saving for college and the potential benefits of a 529 college savings plan. Your clients can make a difference in a child’s life — their own or a grandchild, niece, nephew, or family friend — by opening or contributing to one. Here are three important reasons to share with clients about why it’s a good idea.

College is expensive; loans add to the cost

Tuition and fees are expected to increase by 3%-5% annually. For example, for a child born in 2020, the cost of four years at a private college could rise to $484,808 in 2038 — the year they would start college.¹ That’s more than double the $219,520 cost of a private four-year education in 2020. Plus, point out to clients that the more savings the student has, the fewer loans they or their parents will probably need. This could ultimately lower the cost of college because it can help avoid costly interest payments.

Tax benefits

Contributing to a 529 plan can also help your clients reduce state income taxes. Thirty-four states and the District of Columbia currently offer a state income tax deduction or tax credit for contributions to a 529 plan. (Contributions are not federally tax deductible.) In most states that offer tax benefits, anyone who contributes to a 529 plan can get a state income tax deduction. In 10 states, however, only the plan account owner can claim a tax benefit. See state tax benefits.

Any earnings in a 529 college savings plan grow tax-free, which gives more of the money the opportunity to grow. Remind clients that 529 plan funds can be used for more than tuition. Withdrawals are federal and state tax-free as long as the money is used for qualified education expenses, such as tuition, fees, textbooks, laptops, school supplies, room and board, and other educational expenses for college, vocational and technical college programs, study abroad programs, and postgraduate education such as master’s degrees, doctorates, law school, medical, and dental school. Up to $10,000 can be used for elementary, middle school, and high school tuition for public, private, and religious schools. ²

The power of compounding

The sooner a client saves for a child, the more they may be able to benefit from compounding. Contributions to a 529 plan can add up over time. For instance, by the time a student reaches age 18, a $50 monthly contribution could grow to more than $19,000. Contributing $500 a month for 18 years could grow to more than $191,000.³

How to contribute to a 529 plan

Anyone 18 years and older can open a 529 plan. There’s no age limit for a beneficiary of a plan, which means a client can save for graduate school or a college education later in life.

Be sure to make them aware of the ways to contribute to a 529 plan:

• Accelerated gifting: A special provision allows a person to make five years of contributions (the current year plus four future years) in a single year.⁴ The annual gift amount is $17,000 in 2023, so a person can contribute $85,000 and a married couple $170,000. A person can gift to as many people as they want in a year, so you can superfund a 529 college savings plan for as many children as you want.
• Automatic contributions: Set up regular contributions from a bank or investment account.
• Payroll contributions: Some companies allow contributions directly from a client’s paycheck to their 529 plan. Suggest they check with their HR representative.  
• Relatives and friends: They can easily contribute to an existing 529 plan using Ugift.
  
  

For more ideas about 529 plan possibilities, visit our 529 resources page.