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Planning for higher education costs can be stressful! On average, parents expect to pay roughly 30% of their child’s college expenses. The good news is they tend to pay far less.1
A 529 plan is an education funding savings account that can be used to cover college expenses, and up to $10,000 per year for elementary or secondary, public, private or religious school expenses. This is an investment account that will help grow your savings and allow for tax-free withdrawals if used for qualified educational expenses
There are a few different options for saving for your loved one’s education, but 529s are among the most popular—and for good reason.
Financial Wellness Coach Conor explains:
“The benefit of leveraging a 529 is that any earnings from investing can be taken out free of federal taxes when used on qualified education expenses.2 But the benefits don’t end there. Depending on which state you live in, you could be eligible for a state income tax deduction on contributions, too.”
If you have access to Ayco as a benefit through your company, reach out to a Financial Wellness coach for personalized guidance.
Birthday gifts aside, when you’re ready to start paying for your loved ones’ qualifying education expenses, you can withdraw the money without fear of tax liability. If you pull money from the 529 for a non-qualified expense, you’ll owe both federal income tax (on any earnings) and an additional 10% penalty.3
Another benefit is that this account is dedicated solely to education costs. Now, you might be thinking, “But I heard you can also use your Roth IRA for educational expenses!” While this is true, you may not get the same tax advantages as the 529 plan offers and you may lose on your own retirement savings.
Having a separate investment vehicle to fund education can help you minimize financial stress down the line. Remember, there are loans for college education, but there aren’t any loans for retirement.
Financial Wellness Coach Andrew shares the first step to determining how much you need to save.
By anticipating the cost of your loved one’s college education, you can start saving systematically to help you reach that goal.
If a 529 plan is opened by a parent or the student, it will be considered the parent’s asset when the student applies for financial aid. This can reduce need-based aid at most by 5.64%.4 If the account is owned by grandparents or anyone else, it will not need to be claimed as an asset on the financial aid application.
If any payments are made from a 529 plan owned by the student or parent, the amount will not need to be reported on the aid application. However, for any payments made from an account owned by grandparents or anyone else the amount will need to be reported as the student’s income, which accounts for 50% of financial aid eligibility.
Strategy tip: To avoid reporting 529 withdrawals as a part of income on the financial aid application, grandparents—or anyone else who has a 529 opened for a student—can wait until the second semester of the student’s sophomore year to use the funds in the account, since financial aid applications look at income two years prior to the school year.4
If you don’t necessarily use the full balance in your 529 once the beneficiary is out of school, you can choose whether to change the plan’s beneficiary to yourself, any other children you may have or a close relative, or you can withdraw the money and pay taxes on these funds.
Keep in mind, there is an exception for scholarships. If your child is awarded a scholarship, you can withdraw up to that amount from your 529 plan without having to pay the 10% penalty.3
Other than 529s, you can use education funding savings vehicles such as Coverdell Education Savings Accounts, Custodial Accounts, Roth IRAs and your brokerage accounts to cover your child’s higher education costs.
Coach Andrew has tips on the questions you need to ask yourself to figure out which account is best for you:
If you want to have more control over the accounts, a 529 or Coverdell ESA may be the best option for you. We’ll let Andrew tell you more about these.
Like Andrew said, contribution limits are very important to consider when picking the education savings account for your loved one.
Working with a Financial Wellness coach can help you determine how much you may need to contribute to meet your funding goals. Your coach is a partner in your corner, helping you make financial decisions that are right for you.
Speak with a Financial Wellness Coach—like Rebecca, Andrew or Conor—to get personalized advice on education funding and 529 plans. In the last twelve months, our Financial Wellness coaches had over 2,800 calls to discuss education funding.5 They consider your full financial picture and work with you when and how is most convenient, backed by the power of Goldman Sachs.
Contact a coach for a free-to-you, confidential coaching session to celebrate this 529 Day.
1Hanson, M. (2021, October 13). “College Savings Statistics.” EducationData.org.
2Any link to an Internet site sponsored and maintained by a third party is provided solely as a convenience to you, and does not constitute an endorsement, authorization, sponsorship, or affiliation by Goldman Sachs or Ayco. Neither Ayco nor Goldman Sachs has reviewed or tested any information, software, or products found on the site, and therefore makes no representations regarding the content or sponsors of the site or the suitability or appropriateness of the products or transactions described therein.
3Probasco, J. (2021, November 1). “A Penalty-Free Way to Get 529 Money Back.” Investopedia.com. https://www.investopedia.com/news/penaltyfree-way-get-529-money-back/#:~:text=If%20your%20child%20receives%20a,of%20debate%20among%20tax%20experts
4Saving for College. (2021, July 14). “Does a 529 plan affect financial aid?” https://www.savingforcollege.com/intro-to-529s/does-a-529-plan-affect-financial-aid
5Ayco’s Outcomes Report, April 2022. Summarizing the responses to the Ayco financial wellness assessment during the period of April 2021-March 2022.
Updated for tax year 2020