Financial Planning

529 college savings plans are widely touted as the most effective way to save for college education expenses. Contributions to a 529 plan may be state income tax deductible, grow federal and state tax-free, and can be withdrawn federal and state tax-free if used for qualifying higher education expenses (e.g., tuition, room & board, books, supplies, computers, software, equipment, etc.). As the use of 529 plans has proliferated, however, more people are facing a situation where a portion of the balance may not be needed for college.

The variables involved in planning for college expenses make it tricky to save just the right amount to cover future costs. For example, factors such as future tuition inflation levels, scholarships, your child’s decision to attend a public vs. a private institution, to attend an in-state vs. out-of-state institution (or attend college at all), and variability in future investment returns all make planning for college expenses a difficult task. Luckily, while some minor child savings vehicles require that the assets are turned over to the child at a particular age (e.g., UTMAs/Uniform Transfers to Minors Act), 529 plans allow the account owner to maintain control. Furthermore, 529 plans provide several avenues to divert/divest excess or unused plan balances. Potential options are listed below.

• Change the beneficiary of the 529 account to a qualifying family member to cover their future education costs. Account owners are able to name an eligible family member as beneficiary without triggering a taxable distribution. Qualifying family members include siblings, parents, cousins, nieces, nephews, aunts, uncles, grandparents, and spouses of the beneficiary.
• Leave the money in the current 529 account and allow it to continue to grow tax-free. This strategy may be useful for beneficiaries who choose to go to college (or back to college) later in life. Furthermore, some people pursue this approach with the intention of naming a yet-to-be-born grandchild as the beneficiary in the future. We typically encourage the practice of spending taxable (after-tax) dollars first to allow retirement accounts to grow on a tax-advantaged basis for as long as possible. The same concept holds true for college funds. Allowing the balance to grow tax-free within the 529 account for a generation could result in significant growth between now and the time your (potential future) grandchild attends college.
• Pay for trade or vocational school or a career-training program if your child/children elect to go that route instead. While 529 plans have been marketed as college savings plans, a variety of post-secondary training and education programs qualify.
• Take a non-qualified distribution from the account. Finally, if the potential solutions above are not appealing options, you have the ability to liquidate all or a portion of the built-up dollars within a 529 account. Initial contributions are returned to you tax and penalty free. In the event of a non-qualified distribution, any gains accrued within the account are subject to income taxes, plus a 10% penalty. While the income tax liability and penalty charged on the gains is undesirable, consider that under this situation you have potentially received years of tax-deferred growth. Furthermore, it is important to note that, in the case of a scholarship, the 10% penalty is waived.

As you can see, there are several benefits to using a 529 plan and multiple ways to continue using 529 assets even if the intended student doesn’t require all of the account.

To learn more about how Manning & Napier can help with all aspects of your financial planning, see our Family Wealth Management service.

Consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation. Certain account minimums may apply to be eligible for Manning & Napier’s Family Wealth Management services.