If you are trying to plan ahead for a student’s education, you may want to consider opening a 529 college savings account. In this module we will answer the following questions:
Higher education can be expensive! As a parent, family member, or friend, you may be thinking about ways you can help fund the education for a young student in your life. Well, opening a 529 college savings plan might be the right option for you!
A 529 plan is a tax-advantaged education savings plan offered by a state, college, or consortium of colleges.
Before starting a 529 plan, you will want to:
- Start thinking about investing when your student is young and still has a few years before graduating from high school
- Compare 529 plans in Washington and elsewhere to find what works best for you
- Decide who should open the account
Not only can a 529 plan help fund the education for a student in your life, it can also be a wise investment decision for you! Take a look at the rest of this module to learn more about 529 plans in general and in Washington!
What is a 529 plan?
A 529 plan is a tax-advantaged education savings plan offered by a state, a college, or consortium of colleges. All 529 plans share common federal tax benefits including tax-deferred growth and tax-free withdrawals when funds are used to pay for qualified education expenses. Qualified education expenses include:
- Tuition, fees, room and board, books, supplies, and equipment at universities, colleges, community colleges, and technical schools
- Tuition at private and religious elementary and secondary schools
- Expenses associated with apprenticeship programs
- Principal and interest on certain qualified student education loans.
Withdrawals for qualified expenses are typically free from state income taxes (if applicable) as well. Some states also offer tax credits or deductions for contributions to a 529 plan. If 529 plan withdrawals are not put toward qualified expenses, the earnings portion may be subject to federal and state (if applicable) income taxes, plus a 10% federal penalty (limited exceptions apply).
Nearly every state has its own 529 plan options which fall into one of two categories:
Prepaid Tuition Plans
- Purchase units, certificates, or contracts that are generally designed to keep pace with in-state tuition rates
- Account values are generally not tied to financial market performance
- For some plans, use may be restricted to certain schools and types of expenses and/or the payout value may change if funds are used out of state
- Typically, participants must be a resident of the plan’s state when opening an account
College Savings Plans
- Choose from a mix of investment portfolios typically based on stock, bond, and money market mutual funds (returns are not guaranteed)
- Account values are generally tied to financial market performance
- Payout values do not differ depending on where benefits are used
- Each state’s plan is generally open to all U.S. citizens and permanent residents
If I want to open a 529 plan in Washington, what are my options?
If you want to open a 529 plan through the State of Washington, you can choose from two options:
- Guaranteed Education Tuition (GET) Program
- DreamAhead College Investment Plan
GET is a 529 prepaid tuition plan that allows families to buy tuition units (100 units = 1 year of tuition). The state guarantees that the value of these units will keep pace with the cost of tuition and state-mandated fees at the state’s highest-priced university.
DreamAhead is an investment-based 529 college savings plan. You choose from a variety of investment options depending on your risk tolerance and the student’s age. These investments are not guaranteed by the state, so there is the potential that your investment will grow more slowly (or more quickly) than tuition or that you may lose money.
|Tax deferred growth||Yes (when withdrawals are made for qualified education expenses and you have waited 2 years since purchasing your units)||Yes (when withdrawals are made for qualified education expenses)|
|Eligibility||You or the student must be a Washington resident when you enroll||Available to all U.S. citizens and legal residents|
|Changing beneficiaries||Yes (within immediate family and cousins)||Yes (within immediate family and cousins)|
|Enrollment fee||None for online applications, $50 for paper applications||None|
|Minimum investment||One unit (unit price varies year to year)||$25|
|Guaranteed||Yes. GET units are guaranteed by the state to keep pace with the cost of tuition at the most expensive public university in Washington||No. The value of your 529 account is tied to the success of your investments|
|Savings options||You can pay-as-you-go with lump-sum payments or contract for a specific number of units and pay monthly over time||You can choose investment portfolios based on the student’s anticipated year of enrollment or from a variety of static investment portfolios|
|Maximum Investment||800 units per student||$500,000|
How will a 529 plan impact financial aid offers?
Savings held in a 529 plan account are typically reportable on the FAFSA and may have an impact on the calculation of the financial aid Expected Family Contribution (EFC) formula. The impact and area of the FAFSA to report 529 plan savings in can vary depending on who owns the account. The instructions on the FAFSA form itself indicate where and how to report 529 assets.
- Parent-Owned: per IRS guidelines, 5.64% of 529 assets can be counted toward the family’s EFC (higher EFC = less financial aid) and distributions of the funds aren’t counted against the student as “base-year income.”
- Student-Owned: 20% of the 529 assets can be counted toward the family’s EFC and distributions of the funds aren’t counted against the student as “base-year income.”
- Owned by Other Family: 529 assets have no impact on EFC, but 50% of withdrawals are counted against the student as “base-year income.” For advice on how this can be avoided, consult your tax professional.
Check Your Understanding
#1. Which of the following is true of Washington’s GET program?
While you or the student must be a Washington resident at the time the account is opened, GET investments are guaranteed to maintain their value in terms of tuition at the most expensive WA public university. 100 GET units will always cover 1 year of tuition and fees at the most expensive WA public university.
If tuition and fees are static or decrease, the balance of your account may remain the same or decrease. Investments are determined by the GET Investment Committee, not individual selection.
#2. As long as 529 plan funds are used to pay for qualified education expenses such as tuition, room and board, and books, any account growth is tax-free.
True – As long as 529 plan funds are used to pay for qualified education expenses such as tuition, room and board, and books, any account growth is tax-free.
#3. Prepaid tuition plans guarantee that you will make money.
False – typically, any guarantees are that your account value will keep pace with in-state tuition