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Eyeing College

Mike Zaccardi

INVESTING FOR education costs has never been more popular, as evidenced by recent Morningstar data. The research company found that 2021 was a record-breaking year for assets in 529 college savings plans. At almost $500 billion, total investments are up nearly fourfold over the past decade.

A big reason is the tax advantages—investments grow tax-free if they’re used for qualifying education expenses—plus 529 accounts are treated relatively leniently under the college financial-aid formulas. You can learn more about the accounts from other authors who have real life experience saving through 529 plans.

There are also compelling investment reasons to contribute to a 529 savings plan for your children or grandchildren. Today’s lower stock market valuations and higher bond interest rates should help families investing through 529s in the years ahead. Many 529s feature investments that take a target-date fund approach, similar to the TDFs found in many 401(k) plans.

These core investment options are age-based. There’s a heavy focus on stocks early on and then the asset allocation gradually shifts to bonds as the youngster approaches college age. That means that families across this “glide path” should reap the reward of today’s more favorable outlook for stocks and bonds.

On top of that, 529 investors can enjoy relatively low fees. Morningstar found that the average annual cost of a “directly sold” age-based plan is just 0.34%, or $34 a year for every $10,000 invested. What about plans sold through advisors? They cost families an average 0.84% annually. The implication: You can save a significant sum by simply buying a low-cost direct plan.

Want to research 529 plans? Head to SavingforCollege.com. You don’t have to fund a plan that’s earmarked for your state, but sometimes there are state tax advantages to doing so.

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William Perry
William Perry
4 months ago

My wife and I joined the grandparents club funding a 529 plan last year when a grandson was born. Besides the investment and tax advantages noted by Mike in the blog and the comments there were other considerations that were important to us.
As an over age 70 grandparent I worry about being mentally competent or even alive in a couple of decades when the education payouts occurs. I chose to demonstrate faith and trust in our kids my having one of them named as owner of the 529, no strings attached. I am grateful my son-in-law agreed to do so.This choice eliminated own mortality and future competency worries related to these 529 contributions. I also feel my son-in-law and I are closer from this shared common purpose.
I am hopeful that as as our kids financial circumstances improve that our 529 gifts may also motivate them to contribute.
I further think that contributing to a 529 at birth will help create additional expectation of attending college and the value of doing so in the mind and life of my grandson as he grows.
In addition to an initial gift we also make a modest monthly contribution to the 529. Doing so allows the advantages of dollar cost averaging to work and best of all allows us the pleasure of thinking about our grandson and his future every month.

Mike Zaccardi
Mike Zaccardi
4 months ago
Reply to  William Perry

Great strategy and that should have a big positive impact on your grandson. Thank you for sharing, William!

Andrew Forsythe
Andrew Forsythe
4 months ago

Mike, thanks for this article. I’m a firm believer in 529 accounts and used them to pay for our younger kids’ college expenses (529s weren’t around in time for our older kids).

One thing I learned is the importance of keeping good records, including receipts, for how the 529 funds were spent. I received “letter audits” from the IRS for several years running, basically requiring that I prove that the money was spent for “qualified education expenses”. Fortunately, I had the records but simply putting together a detailed response to the IRS was a chore.

This was many years ago so I don’t know if there have been any changes at the IRS, but back then there seemed to be a presumption that all 529 funds spent were not for qualified educational expenses and it was up to the taxpayer to prove otherwise.

Sonja Haggert
Sonja Haggert
4 months ago

Good reminder for those of us that will be doing the paperwork in the future.

Mike Zaccardi
Mike Zaccardi
4 months ago

Thank you, Andrew. Ugh – that is a chore! A very good reminder on always keeping an audit trail.

Kari Lorch
Kari Lorch
4 months ago

I am so glad I invested in a 529 early on, no worries now paying for daughter’s college. When co-workers had new babies I would always share the 529 advice and tell them to just start early, but the typical response was ‘I dont know how to do that’ and move on with a busy life of parenting a newborn. Most folks thought they had to go to a professional to get the plan started. That works, but it is very simple to do online.
Our son always wanted to go into the military and he served his 3.5 years and now makes full use of the post 9/11 GI bill which is full tuition and living expenses, so his 529 funds have transferred to his siblings. All around a good deal!

Mike Zaccardi
Mike Zaccardi
4 months ago
Reply to  Kari Lorch

Nice work, Kari. And thank you for your son’s service! 529s’ transferability is one of the best features, in my opinion.

Rick Connor
Rick Connor
4 months ago

Great article Mike. I always review Morningstar’s Fall review of 529 plans (https://www.morningstar.com/articles/1062917/the-top-529-education-savings-plans-of-2021), and have shred them with my sons and others. Great point about contributing now at lower valuations.

Mike Zaccardi
Mike Zaccardi
4 months ago
Reply to  Rick Connor

Thanks, Rick!

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