Both Michelle and I have been called geeks before, a moniker we embrace. We like to recognize geeky-type days throughout the year, such as May the Fourth (be with you), Pi Day (3/14), and of course, 529 day (5/29).
Hopefully, you already know, 529 Savings Plans are a lot like Roth IRA's but are designed specifically as education savings vehicles. You contribute after-tax dollars to the account, those dollars are invested, and any earnings are tax-free so long as the money is used for qualified education expenses. You also can compare and shop between each state's 529 plan to pick the plan that fits you best. No matter which of the state 529 accounts you choose, you can use the money to cover qualified educations expenses throughout the country and even some schools overseas.
The end of 2019 brought changes to 529 plans that you may not be aware of. The SECURE Act, signed by Donald Trump in December of 2019, expanded the use of 529 money and, accordingly the strategies on how we can use the accounts. Florida also made changes to its program that makes the Florida 529 plan much more attractive, and with the changes, we believe the plan is now worth another look. Here’s what you should know.
SECURE Act Changes
529s have been addressed in the background of extensive legislation over the last few years. For us geeks, that’s exciting. First was the Tax Cuts and Jobs Act in 2018 (which allowed withdrawals of up to $10,000 a year from 529s to pay tuition for k-12 schools). The SECURE Act recently made two additional notable changes. First, 529 withdrawals can be used to repay up to a lifetime limit of $10,000 of qualified student loans. Second, you can also use the money towards the costs of apprenticeship programs.
Being permitted to use 529 withdrawals toward loans provides some financial planning opportunities related to taxes. This potential tax benefit does not apply to those of us here in Florida, but if you live elsewhere and have stumbled on this blog post, or if you have friends or family in a different state, this is potentially a way to save some money. Many states allow deductions on their state income tax for contributions into the state 529 plans. A number of those state 529 plans also allow for immediate withdrawals of money that is contributed. If you live in an area where this is available, you can contribute to that state’s 529 plan, take the state tax deduction, and immediately withdraw the money to make your loan payment, effectively reducing your state income taxes, while paying down your loan. Uncle Sam won’t allow you to double-dip by taking a tax-free withdrawal and also claiming the student loan interest deduction though, so the 529 strategy may not give you the best benefit. That said, the student loan interest deduction phases out as you earn more. You need to compare the tax benefits of flowing money through a 529 to make loan payments against paying with regular after-tax money and taking the student loan interest deduction to see what makes the most sense.
The other planning opportunity I see is in the situation where the grandparent owns the 529 plan for the child. As Clark Howard writes, a grandparent-owned 529 plan can actually hurt the student’s chances of receiving financial aid because of how the aid formula works. The student is only hurt when money is distributed out of the grandparent-owned 529 to the child. This opens the possibility of holding the funds in the 529 the whole time the child is in college and then repaying up to $10,000 of the loan tax-free once they graduate. This scenario would allow a tax-free distribution and would not negatively impact the student’s financial aid.
Florida’s 529 plan
If you asked Michelle or me what we thought about Florida’s 529 plan last year, we would have told you to look at a different plan, such as Utah’s my529 plan. Late last year Florida announced changes to its plan and in our opinion, the changes make it a more attractive option. They have expanded the investment options, including adding additional fund managers like Vanguard to the mix. You can choose from age-based portfolios, static risk-based portfolios, or create your own portfolio from a limited set of funds. The investment expenses on those options have gone way down, some by more than 70%. For example, the age-based portfolios and the static risk-based portfolios range in costs from 0.07% to 0.21%, which I think is low. Even better, Florida is not charging an administration cost in addition to the investment expense like is present in many other state plans. The bottom line is that anyone who is looking for a 529 account, should compare the different plans out there and pick the one that fits best. In the past Florida’s 529 probably didn’t deserve a second look for most. Today, it is much more competitive and could possibly be a great fit.
As a parent and financial advisor, you are saving for education is always a topic near and dear to my heart, not just on national 529 day. We would be happy to talk to you about your education savings goals and your personal situation should you have any questions. Give us a call at 904-374-9098 or shoot us an e-mail at firstname.lastname@example.org.
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal, or tax advisor for specific information pertaining to your situation.