Tuition strategies for when your family has leftover funds in 529 college savings plans — or when you are planning ahead for your own professional development.
John Madison’s story isn’t typical. When the time came to pay for his daughters’ college education, the Virginia-based certified public accountant found himself with a surplus in their 529 plans. Assuming that his youngest child doesn’t use the remaining funds, Madison has his own plans.
“I’ve already begun researching additional professional education and certifications,” he says. “Many universities and colleges offer certificate programs that would enhance my knowledge, and I could transfer my daughters unused 529 balance to an account on which I am the beneficiary.”
The national cost of postsecondary education is rising, but there’s good news for Washington residents: In-state tuition and fees have decreased 16 percent over the last five years, according to data from College Board’s “Trends in College Pricing 2017” report, potentially easing the financial burden of pursuing a graduate degree or continuing education as a working adult. Even so, the average price tag for Washington students for the 2017-18 school year was around $10,000, and a 529 college savings plan can help to offset the costs.
What is a 529 savings plan?
A 529 savings plan is an investment vehicle used for qualified education expenses, similar to an IRA or 401(k) but for college savings. In a 529 plan, the risk is borne by the investor.
While usually aimed at helping parents plan for their child’s education, any investor who is at least 18 years old and has a Social Security number may open an account for themselves or a relative. The main benefit of a 529 plan is the tax break: The Internal Revenue Service notes that 529 earnings made with after-tax contributions are not federally taxed, and Washington residents are not subject to state tax. Morningstar, an investment research company, provides annual ratings for 529 savings plans based on a variety of performance factors. (Visit goo.gl/HmLrFn for the 2017 ratings.)
Earlier this year, Gov. Jay Inslee signed into law a bill that will allow investors in the state’s Guaranteed Education Tuition (GET) fund to roll their accounts over into the state’s new 529 college investment plan, called DreamAhead.
Becoming the beneficiary
In addition to the tax benefits, an attractive feature of 529 savings is the plan owner’s ability to change beneficiaries — usually once a year — to another family member or even to themselves. For parents whose children have completed college or chosen not to attend, using the remaining funds is an option, but not one that Robin Tan, a Kirkland-based certified financial planner, sees utilized.
“I have seen leftover 529 funds, but that doesn’t happen very often. And in the situations where there were leftover funds, the parents haven’t used them,” Tan says.
“Not using funds isn’t that rare, especially for wealthy families,” Tan said. “Some of them fund 529 plans with the intention of passing them down from generation to generation because they grow tax-free.”
While leaving an inheritance is tempting for close-knit families, employment trends point to the benefits of continuing education. According to a 2017 CareerBuilder survey, 33 percent of employers are hiring candidates with master’s degrees for roles that were once held by those with four-year degrees.
“As a society, we’ve entered a new world of work where job requirements are constantly changing and the need to upskill is a must,” says Rovy Branon, vice provost of the University of Washington’s Continuum College.
It’s important to consider how using 529 funds today could improve career prospects and income growth.
Opening a new account
Professionals who want to further their education can open a new 529 account, an option that Tan says requires time and foresight. “If you’re in your 30s and say, ‘Well, when I’m 45 I’m going to pursue my MBA,’ it’s worthwhile in that situation, but most people don’t think that way.” he says. “Let’s say you put $20,000 into a 529 plan and you need it in three years. You wouldn’t put all your money into an aggressive stock mutual fund because if the stock market were to drop, say, 20 percent in the second year, then the money you had for college is down. And while you might get a tax break, that only applies to 529 earnings, and you might not have any after only three years.”
Tan recommends an investment period of at least seven years to encourage growth with allocated funds, much like investing in a 401(k) retirement plan. “The 529 plan is just a vessel; it’s what you put into it that’s important.”