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What Are 529 Education Savings Plans

529 Plans: Savings for College

Between normal, day-to-day expenses and long-term goals such as retirement, figuring out how and how much to save for your child’s education can be challenging.

One financial strategy you might consider? Setting up a 529 plan. A 529 plan is a state-sponsored education savings plan that can be used toward elementary, secondary or higher education expenses for the account beneficiary. 529 plans offer account owner tax advantages, flexibility and control.

Your Edward Jones financial advisor can help you determine how a 529 plan might work with your overall financial strategy, as well as think through specific questions you might have:

  • Is a 529 plan a good fit for you?
  • What is your family’s education savings goal?
  • What investments might make sense for you and your education goals?

Earn Free Savings For College

Take advantage of Upromise® that returns a percentage of your eligible spending at hundreds of Americas leading companies and transfers that money periodically to your plan account, subject to a minimum amount.¹

¹Funds in a Upromise account will not be transferred until earnings reach a minimum amount. Go to for more information on transfer minimums. Upromise is offered by Upromise, Inc. and is separate from the Plan.

Go Anywhere With Virginia529

Use your Virginia529 account to pay for qualified higher education expenses at schools nationwide and even overseas. These accounts arent just for college, either they can also be used to pay for qualified higher education expenses at public or private universities, graduate schools, vocational schools, trade schools and tuition at private or religious K-12 schools.

If you, your spouse or your child currently live in Virginia, you may also consider Prepaid529. This program lets you prepay tuition and mandatory fees at Virginia public colleges and universities at todays Prepaid529 rates.

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College Saving Options Through Traditional Investment Accounts

In addition to special tax-advantaged accounts, for many American expats, using traditional investment or retirement accounts for college expenses can also be an excellent choice.

A taxable brokerage account is a powerful savings vehicle for a college education when coupled with low-cost and tax-efficient Exchange Traded Funds . By investing early, taxpayers are able to minimize capital gains and enjoy the lower long-term capital gains rate. In certain cases, this might be the best option for Americans abroad who face uncertain local country tax consequences of a college savings account designed in and for the United States. In any case, brokerage accounts are usually better than using a local country college savings scheme that creates uncertain tax consequences in the United States.

Money can be distributed out of an IRA at any time to pay college costs without incurring the 10 percent early withdrawal penalty that typically applies to withdrawals from an IRA before age 59 1/2. However, distributions are still subject to tax under the usual rules for traditional and Roth IRA distributions. In certain cases , retirement accounts can be used to mitigate certain tax problems created by 529 plans in the country of residence.

Investment Management By Vanguard

529 Tax Guide

When you choose the CollegeInvest Direct Portfolio College Savings Plan, you gain the expertise of Vanguard, one of the worlds largest and most trusted investment management companies.

Vanguard offers you an impressive package: time-tested investment principles, client-focused values, and costs that are among the lowest in the mutual fund industry. Vanguard focuses on attaining superior long-term performance for investors rather than chasing the latest market fad.

All of these factors work together to help you reach your savings goals.

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You Might Easily Trigger A Penalty

The rules on 529 plans are strict. The most important one is this: you must use funds in a 529 account to pay for qualified educational expenses. Otherwise, youll owe taxes on the investment gains at whatever the IRS would normally charge you plus an additional penalty rate of 10 percent.

Qualified education expenses include tuition and fees, room and board as well as textbooks. They may also include other expenses for attending college such as a computer and software used primarily for the classroom. And 529 plans arent good only for college they can be used for K-12 tuition at private schools too.

Also, thanks to 2019s SECURE Act, up to $10,000 can now be used to pay off student loans for the beneficiary and an additional $10,000 can be used for each of the beneficiarys siblings.

While those rules may be easy enough to understand and follow, its possible to accidentally trigger a penalty even with the best of intentions.

For example, a parent might withdraw a full years tuition at the start of the school year in fall. However, only one semesters tuition is due then, while tuition for the spring semester is due at the start of the following calendar year. So this extra withdrawal would incur regular taxes plus the bonus penalty, even though the parent had every intention of using it for qualified expenses.

Some savers might think that the additional restrictions on 529 plans are not worth the hassle.

How Can Northwestern Mutual Help You Plan

At Northwestern Mutual, we believe everything should be part of a larger financial plan, based on your unique situation. We look at everything you have going onyour goals, needs, and priorities as well as your savings and spending habits. Then we’ll make recommendations that will work with your financial plan, and help you achieve everything you want. Over 4.3 million people have put their trust in Northwestern Mutual for their financial planning goals. We’d love to help you plan for your child’s or grandchild’s college education.

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Withdrawals From A 529 Plan Account

Take advantage of professional money management experience from Fidelity

Withdrawals from a 529 plan account can be taken at any time, for any reason. But, if the money is not used for qualified education expenses, federal income taxes may be due on any earnings withdrawn. A 10% federal penalty tax and possibly state or local tax can also be added.There are exceptions to the 10% penaltyfor instance, if the beneficiary receives a scholarship or attends a US military academy. Any earnings would still be subject to federal income tax and any state and local taxes.

Easily Started And Maintained

5 Steps for Picking the Best 529 Plan in Any State

You can open an Invest529 account with as little as $25 and decide how much and how often to contribute from there. Plus, our programs offer some of the lowest fees in the country among 529 plans. You can save up to $500,000 per beneficiary, and there are no household income limits for Virginia529 participants.

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What Are The Best And Worst States For 529 Plans


What are the best states for a 529 education savings plan? What problems are there with these plans? These are tax-advantaged programs, sponsored by states, that allow your investments to grow tax-free and be spent without a tax bite for educational expenses. Stephen Nelson, a wealth manager at Aldrich Wealth in Carlsbad, Calif., tells us how to pick the right one for you:

Larry Light: Lets say Ive decided to start contributing to a 529 plan for my kids education. Now what?

Stephen Nelson: 529 plans are the best way to save for college due to the tax-free growth and tax-free withdrawals if used for college expenses. However, the decision doesnt end there. There are some more hidden hurdles with 529s that many people are unaware of that could hurt their savings growth or make the withdrawal process frustrating when it actually comes time to pay for college.

Light: What are some of these obstacles that people arent thinking about?

Nelson: First thing, direct sold savings programs versus broker sold savings programs. Many people dont know the difference when they sit across from an advisor and are discussing setting up a 529 Plan.

Light: How do you know if its a broker sold program?

Light: What other problems are lurking?

Light: What states have had recent program changes?

Light: OK, say Ive chosen my plan but picking the investments is making me nervous. How do I go about selecting investments for my childs future?

Plan State Tax Deduction

Some states provide benefits including state tax incentives to residents who invest in their home state’s 529 plan. And seven states Pennsylvania, Arizona, Missouri, Minnesota, Montana, Arkansas and Kansas provide for state tax parity, which means contributions to any state plan are eligible for that state’s income tax deduction.

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Investment Choices Can Be Limited

A 529 plan may allow you to invest in a number of different assets, including stock funds, bond funds, and FDIC-protected money market accounts. Many states also offer target date funds that adjust the mix of your investments so theyre less risky as you approach the time to use the money.

But 529 plans are administered by each individual state, and the plans may not offer an attractive investment opportunity, depending on which plan you choose. For example, some state plans may offer only high-cost funds or a limited selection of funds.

For those with investment expertise, that can be a significant downside over investing the money in more attractive things such as individual stocks. It may be even worth paying taxes in a taxable account to be able to invest in these other options.

Matt Gallagher, founder of Odinic Advisors in Plymptonouth, Massachusetts, says that while he set up a 529 plan for his oldest child, hes opted for taxable brokerage accounts for his younger two children.

In Massachusetts, Gallagher says, I really dont like the investment options in target date funds and general basic ETFs. I would rather have the flexibility of a brokerage account and its investment options than the state tax benefits of a 529.

For those without the expertise to pick their own investments, however, the limited options may be acceptable and even preferable.

The Tax Advantage Of A 529 Plan Can Make A Big Difference Over The Long Run

529 College Savings Plans: All 50 States Tax Benefit ...

$500 monthly contributions in hypothetical accounts growing at a rate of 6%

This example assumes contributions of $500 per month, a hypothetical 6% nominal rate of return compounded monthly, and a 28% tax bracket for the taxable account. The returns shown are for illustrative purposes only. They are not representative of any particular investment and are not intended to predict the return of any investment, which will fluctuate. Capital gains, exemptions, deductions, and local taxes are not reflected. Investors should consider their personal investment horizon and income-tax brackets when making an investment decision.

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Contributions And Fees Can Be High

Be careful of fees, says Ksenia Yudina, CEO and founder of UNest, a college savings app to help families save for education. Parents can easily end up seeing a significant percentage of their savings go to the financial institution or investment manager running the 529.

Fees may be higher than they otherwise would be if you had a wider selection of options another part of the downside of limited investment options. Your state 529 plan may offer only relatively high-cost ETF index funds, for example. And with low-return options such as bond funds, a higher expense ratio can really hurt the total return.

These funds charge an expense ratio as a percentage of the amount you have invested in them. Higher-cost funds might charge you 0.5 percent or more annually, or about $5 for every $1,000 invested. That might not seem like a lot, but low-cost funds today are priced under 0.1 percent, or $1 for every $1,000 invested.

Also, dont forget that as your money grows, youll be paying more each year for the fund. And this expense can nibble away at your returns over time.

Yudina also cautions savers to examine how much a states plan requires them to add each month.

Many plans require a minimum contribution of hundreds of dollars a month, she says. This is beyond the reach of many families.

Specific Considerations For The American Expat: Country

All of the above education savings options are available to American expats. However, there are no tax treaties between the United States and any foreign country recognizing the tax-advantaged status of 529 savings plans or Coverdell ESAs. Depending on local country tax laws, using a U.S. education savings plan may actually be a counterproductive way to save for education expenses because investment gains and distributions could be subject to local country tax laws. In those cases, the expat may consider changing the account ownership to a trusted US-based family member.

Local country college savings accounts can also create similar headaches for expats when filing U.S. tax returns. In the United Kingdom, Junior ISAs are available to help parents begin saving for college. In Canada, parents have the option to open up a Registered Savings Plan which allows tax deferral similar to a 529 plan. All of these accounts offer tax advantages not recognized in the United States. This will generally make them a poor investment option for American expat investors because of harsh US tax treatment.

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Does A 529 Plan Impact Financial Aid

Regardless of whether the 529 plan is owned by the parent or the student, it is considered a parental asset, which generally has little impact on financial aid. For more information on your state’s financial aid considerations, talk to your financial advisor.

Financial aid is a complex subject and a financial aid officer should be consulted.

Helpful resources

John Hancock Freedom 529 Plan Offers Additional Benefits

âPros and Cons of 529 College Savings plansâ?
  • Its easy to get started. You can open a 529 plan with as little as $250 and each account can accept up to $475,000 per beneficiary.
  • You may be eligible for in-state tuition at the University of Alaska.
  • You receive creditor protection through the State of Alaska.
  • You can use our Education Planning Center to receive college guidance from birth to graduation.

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Why Should I Consider Saving For College In A 529 Plan

The biggest reasons to consider a 529 plan are the structured savings and the tax benefits. Merely having a specific college savings vehicle could encourage you to save more than you would have otherwise. And choosing a 529 plan rather than a traditional savings account gives you the benefit of tax-free growth on investments and a potential state tax break.

Youre Our First Priorityevery Time

NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Our estimates are based on past market performance, and past performance is not a guarantee of future performance.

We believe everyone should be able to make financial decisions with confidence. And while our site doesnt feature every company or financial product available on the market, were proud that the guidance we offer, the information we provide and the tools we create are objective, independent, straightforward and free.

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The Top 529 College Savings Plans Of 2020

A look at how 529 investments stack up under our enhanced methodology.

Each year, Morningstar’s team of manager research analysts evaluates the 529 investment universe and assigns forward-looking, qualitative Morningstar Analyst Ratings for 529 college savings plans based on our assessment of their investment merits. This year is pivotal, as it marks the first methodology enhancement to the ratings that debuted eight years ago. This reflects our understanding of what drives compelling outcomes for 529 plan participants and takes into account the broader industry’s evolution and rising standards.

This year, Morningstar analysts assigned ratings to 61 plans that captured 97% of the more than $363 billion invested in 529 plans as of Aug. 30, 2020.

Under the enhanced methodology, we now organize our research around four key pillars: Process, People, Parent, and Price. Pillar-level research informs our holistic view of plans and results in the Analyst Rating for 529 plans, a five-tiered scale that, from highest to lowest conviction, includes three Morningstar Medalist designations , Neutral, and Negative. This year’s review led to a number of ratings changes that included 12 upgrades and 15 downgrades. We also initiated coverage of three plans and ceased coverage of four.

Tool: Find The Best 529 Plan For You

How Much Is Your State

Luckily, tools are available to help you scale the heights. State-sponsored investment programs known as 529 plans, as well as other kinds of savings programs, can provide the momentum you need to reach your goal. And you probably wont need to save the full amount. Most families get a discount in the form of grants, scholarships and education tax breaks and use loans to fill the gapmore than two-thirds of college seniors graduate with student debt.

A more realistic goal: Save about one-third of your expected college costs. When the time comes, current income, grants and loans can cover the rest. Planning ahead is the key, says Betty Lochner, of the College Savings Plans Network, which collects data on 529 plans.

The best place to save is in a 529 plan. Sponsored by 48 states and the District of Columbia , these investment accounts let your savings grow tax-free, and the earnings escape tax completely if the withdrawals are used for qualified college expenses, which include tuition, fees, and room and board. The appeal of 529 plans lies in their easy access as well as their tax benefits. The plans have no income limit and set a high cap on contributions. Two-thirds of the states and the District of Columbia give a tax deduction or credit for contributions. If your child skips college, you can make the recipient a sibling, grandchild, niece or nephew without losing the tax break.

Which plan?

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