5 Money Saving Tips for Your Children’s 529 Plan

You might think all 529 plans are the same.
This can be a costly mistake. 

529 Plans are tax-advantaged savings vehicles that allow families to put money away for K-12 and college. Money in the plan will grow tax-free until it is needed for education expenses such as tuition, room and board, computers, and textbooks. Here are five tips you can use to maximize the balance in your children’s account.

1. 1. Choose your plan provider carefully. State-sponsored plans are readily available and many include additional matches and tax benefits for their residents. A Morningstar study found that, on average, 529 investors who received tax breaks reduced their state tax bill by $87 for every $1,000 they saved—that’s an equivalent of an 8.7% return.  However, some state’s plans have high costs, poor investment options, and few tax incentives.  
   2. Choose the investments carefully. In selecting the underlying investments of a plan, there will typically be a variety of options with a range of associated fees. Look for options with low-cost, age-based allocations or funds. These age-based selections will manage how the plan is invested over time, automatically reducing the allocation to equities and increasing the allocation to bonds as the beneficiary approaches college-age.
   3. Superfunding: Contributions to 529 plans are treated as gifts to the beneficiary, so $15,000 per individual or $30,000 from a married couple can be contributed without triggering a gift tax. 529 plans have a unique feature which allows pre-funding of up to 5 years, amounting to $75,000 or $150,000 respectively, in a single year. This “superfunding” maximizes compounding over an 18-year time horizon, potentially resulting in an ending account balance nearly 50% higher at the end of 18 years compared to equal annual contributions.
   4. Consider gifting to reduce estate taxes: If a family member is considering gifting to a relative’s education, have them take advantage of superfunding the beneficiaries account so the money will grow tax-free. If they decide to let their money grow in their own accounts and gift it at a later date, or dates, they will suffer damaging tax consequences.’
   5. Transferring leftover funds: If your child received a scholarship or an unexpected gift from a relative, you may be wondering what to do with the extra funds in their 529 plan. Fortunately, the IRS will allow the funds to be transferred tax-free to a qualifying relative (including your other children).