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529 Plans: A Smart Way to Save for Education Just Got Smarter.

There has never been a better time to educate yourself about 529 plans, between expanded flexibility and increased tax advantages.



In 2019 we said goodbye to some beloved things such as Game of Thrones and the Star Wars Skywalker Saga. But as the decade ended we ushered in some new changes that got us talking—for example, Megxit and the SECURE Act. And while Megxit only impacted our royal daydreams, the SECURE Act legislation makes a difference for many Americans who are saving for retirement or college.

The SECURE Act, which stands for Setting Every Community Up for Retirement Enhancement Act, was signed into law on December 20, 2019. Aimed at making saving for retirement easier and more secure, the Act made changes to rules surrounding tax-advantaged retirement accounts but also made pretty important changes to the uses of 529 plans.

And those changes to 529 plans make using the plan to save for college and other education expenses, even more attractive.

 

A What Plan?

If you don’t know what a 529 plan is, you’re not alone. Since their inception in 1996, 529s have been one of the best ways to save for college, but they’re still underused. Only 29% of parents saving for college take advantage of them.1 Parents who save for education other ways explain that either they don’t know what 529 plans are or they don’t understand enough about them to open one.

So, let’s break it down—what are 529 plans? They’re state-sponsored, tax-advantaged savings accounts that grow tax free. Investments within a 529 plan range from aggressive to conservative. And there are even age-based portfolios, which become increasingly conservative by allocating more to fixed income as the beneficiary nears college age. Of course, as with any investment, returns are not guaranteed, and you could lose money by investing in a 529 plan. Fees and expenses vary by state, as do tax advantages, but all-around they’re an excellent way to save for education expenses.

At the federal level, 529 plans are attractive because they’re funded with after-tax dollars, interest compounds tax free, and funds (for qualified expenses) can be withdrawn without being taxed.2 At the state level, tax advantages vary from state to state and from plan to plan. More than 30 states offer tax deductions or credits on contributions to 529 plans at the state level,3 though this is nothing new. Make sure you search for your state plan to see if it has a state tax income or any other benefits exclusive to your state’s program.

These plans are also flexible. Funds from a 529 plan have historically been applicable to all qualified post-secondary education expenses, namely college tuition, room and board, books, supplies, etc. In 2017, 529 plan funds became applicable to private K-12 education as well; $10,000 per year, per child, can be withdrawn annually to cover education costs.2

Additionally, if your child gets a scholarship or decides not to pursue higher education, you have the flexibility to transfer the 529 plan to someone else, including yourself. That’s right, you can set up a 529 plan for yourself—so no kids, no problem. Anyone can save for education with a 529 plan.

Whether you already know about the savings potential of 529 plans or not, you may not know that there have been some significant changes to the plans as part of the most recent tax overhaul.

Now, 529 plans are even more flexible, applying to a wider range of education expenses. As a result of the SECURE Act, 529s can now be used to pay for certain apprenticeship programs, and a maximum lifetime limit of up to $10,000 per student can be withdrawn to pay for qualified student loans.

 

Increasing Flexibility

In the past, funds from 529 plans could be applied only to qualified post-secondary education expenses. While the definition of education expenses was broad, the money had to be used for post-secondary school, whether that be a 2-year college, culinary or technical school, a 4-year undergrad program, or some other kind of education beyond high school.

With the expansion of the use of 529s in 2017 for private-school K-12 tuition and the latest reforms as part of the SECURE Act allowing families to use their 529 savings for student loan repayment and apprenticeships, the already flexible 529 can be used for more now than ever.

 

Getting Down to Business

Sure, the increasing flexibility of a 529 plan is great news for anyone looking to save for college, but what impact does that really have on what your child’s higher education might look like in the future?

The inclusion of apprenticeships is another incentive for families hoping to save for college but unsure if their child will go the traditional route. Tax-free distributions from 529 plans can be used for fees, textbooks, supplies, and equipment associated with apprenticeships. In order for an apprenticeship to be a qualified 529 expense, though, the apprenticeship program must be registered and certified with the US Secretary of Labor. A search tool to verify that registration can be found on the Labor Department’s website.

In terms of student loan repayments, students can use a maximum lifetime limit of up to $10,000 tax-free for payments toward qualifying student loans. Even better, this also applies to the siblings of the beneficiary, up to $10,000 each. However, it is important to note that any student loan interest paid for with 529 earnings is not eligible for the federal student-loan interest deduction.

Not only does this help ease the significant student debt burden for many people, but it’s a great way to use up funds remaining in a 529 plan after a child graduates. And this could be good news for grandparents wishing to contribute to a 529 plan for their grandchildren.

Grandparent-owned 529 plans are not reported on the Free Application for Federal Student Aid (FAFSA) and are considered untaxed income for the student.4 This could mean that the student’s need-based aid could be reduced by as much as 50%.4 With the new changes from the SECURE act, a grandparent could still take advantage of a 529 plan and avoid the negative impact of their contribution on financial aid by waiting until a child graduates and using the funds for student loan repayments instead.

 

Next Steps

If you don’t have a 529 plan (yet), talk to your financial advisor to determine whether opening a 529 might be a smart option for you and your family. If you do, get excited, but do your due diligence. Before you rush to cash in 529 funds to pay for student debt or an apprenticeship program, be sure that your state follows the federal government’s lead and that these are considered qualified expenses for you. Depending on what your state chooses to do, you may risk the state rescinding the tax incentives, penalties, or taxes on earnings withdrawn.

If you’re interested in potentially using future earnings for student loan repayment, be sure to consider the plan you choose carefully as some plans grow more conservative as a child nears higher education years. Your financial advisor can help you establish the right plan for you, given your state, plan, tax level, and circumstances.

Higher education isn’t getting any cheaper, and the student debt crisis has reached a staggering $1.6 trillion dollars in the US with no signs of slowing.5 If you’re interested in planning for your own future or your children’s to offset these growing costs, an increasingly flexible 529 plan might just be a smart place to start.

 

What Does Your State Offer?

STATE TAX BENEFITS
Alabama Contributions to an Alabama 529 plan of up to $5,000 per year (individual) and $10,000 per year (married filing jointly) are deductible in computing Alabama taxable income
Alaska Alaska does not have a personal income tax
Arizona Contributions to Arizona AND non-Arizona 529 plans of up to $2,000 per year (individual) and $4,000 per year (married filing jointly) are deductible in computing Arizona taxable income
Arkansas Contributions to an Arkansas 529 plan of up to $5,000 per year (individual) and $10,000 per year (married filing jointly) are deductible in computing Arkansas taxable income. Contributions to a NON-Arkansas plan of up to $3,000 per year by an individual, and up to $6,000 per year by a married couple filing jointly, are deductible. 
California No state income tax deduction for contributions to 529 plans
Colorado Contributions to a Colorado 529 plan, to the extent of the contributor's federal taxable income, are deductible in computing Colorado taxable income
Connecticut Contributions to a Connecticut 529 plan of up to $5,000 per year (individual) and $10,000 per year (married filing jointly) are deductible in computing Connecticut taxable income, with a five-year carryforward of excess contributions.
Delaware No state income tax deduction for contributions to 529 plans
District of Columbia Contributions to a District of Columbia 529 plan of up to $4,000 per year (individual) and $8,000 per year (married filing jointly) are deductible in computing District of Columbia taxable income, with a five-year carryforward of excess contributions. Only contributions made by the account owner are deductible.
Florida Florida does not have a personal income tax
Georgia Contributions to the Georgia 529 plan of up to $4,000 per beneficiary per year (individual) and $8,000 per year per beneficiary (married filing jointly) are deductible in computing Georgia taxable income.
Hawaii No state income tax deduction for contributions to 529 plans
Idaho Contributions to an Idaho 529 plan of up to $6,000 per year (individual) and $12,000 per year (married filing jointly) are deductible in computing Idaho taxable income
Illinois Contributions to an Illinois 529 plan of up to $10,000 per year (individual) and $20,000 per year (married filing jointly) are deductible in computing Illinois taxable income
Indiana A 20% tax credit on up to $5,000 per year in contributions to an Indiana 529 plan can be claimed against Indiana income tax (maximum yearly credit is $1,000)
Iowa Contributions to an Iowa 529 plan of up to $3,439 for 2018 per beneficiary (individual) and up to $6,878 per beneficiary (married filing jointly) are deductible in computing Iowa taxable income. The maximum deduction increases each year with inflation. Only contributions made by the account owner are deductible.
Kansas Contributions to Kansas AND non-Kansas 529 plans of up to $3,000 per year (individual) and $6,000 per year (married filing jointly) per beneficiary are deductible in computing Kansas taxable income
Kentucky No state income tax deduction for contributions to 529 plans
Louisiana Contributions to a Louisiana 529 plan of up to $2,400 per year (individual) and $4,800 per year (married filing jointly) are deductible in computing Louisiana taxable income. 
Maine No state income tax deduction for contributions to 529 plans
Maryland Contributions to a Maryland 529 plan of up to $2,500 per year (individual) and $5,000 per year (married filing jointly) are deductible in computing Maryland taxable income, with a 10-year carryforward of excess contributions. 
Massachusetts From 2017 through 2021, contributions to Massachusetts 529 plans of up to $1,000 per year (individual) and up to $2,000 per year (married filing jointly), are deductible in computing Massachusetts taxable income.
Michigan Contributions to a Michigan 529 plan of up to $5,000 per year (individual) and $10,000 per year (married filing jointly) are deductible in computing Michigan taxable income. 
Minnesota Contributions to Minnesota AND non-Minnesota 529 plans of up to $1,500 per year (individual), and up to $3,000 (married filing jointly), are deductible in computing Minnesota taxable income. Alternatively, a tax credit equal to 50% of the contributions to accounts, reduced by any withdrawals, may be claimed with a maximum credit amount of up to $500, subject to a phase-out as income increases.
Mississippi Contributions to a Mississippi 529 plan of up to $10,000 per year (individual) and $20,000 per year (married filing jointly) are deductible in computing Mississippi taxable income. 
Missouri Contributions to Missouri AND non-Missouri 529 plans of up to $8,000 per year (individual) and $16,000 per year (married) are deductible in computing Missouri taxable income. Only contributions made by the account owner are deductible, except for spouses filing a joint return.
Montana Contributions to Missouri AND non-Missouri 529 plans of up to $8,000 per year (individual) and $16,000 per year (married) are deductible in computing Missouri taxable income. Only contributions made by the account owner are deductible, except for spouses filing a joint return.
Nebraska Contributions to a Nebraska 529 plan of up to $10,000 per year (single and married filing jointly) and up to $5,000 per year (married filing separately) are deductible in computing Nebraska taxable income. Contributions made by the account owner or parents of the beneficiary are deductible.
Nevada Nevada does not have a personal income tax
New Hampshire New Hampshire does not have a personal income tax
New Jersey No state income tax deduction for contributions to 529 plans
New Mexico Contributions to a New Mexico 529 plan are fully deductible in computing New Mexico taxable income
New York Contributions to a New York 529 plan of up to $5,000 per year (individual) and up to $10,000 per year (married filing jointly) are deductible in computing New York taxable income. Only contributions made by the account owner or the account owner's spouse are deductible.
North Carolina No state income tax deduction for contributions to 529 plans
North Dakota Contributions to the North Dakota 529 plan of up to $5,000 per year (individual) and up to $10,000 per year (married filing jointly) are deductible in computing North Dakota taxable income. 
Ohio Contributions, including rollover contributions, to an Ohio 529 plan of up to $4,000 per beneficiary per year (any filing status) are deductible in computing Ohio taxable income, with an unlimited carryforward of excess contributions.
Oklahoma Contributions to an Oklahoma 529 plan, including rollover contributions, of up to $10,000 per year (individual) and up to $20,000 per year (married filing jointly) are deductible in computing Oklahoma taxable income, with a five-year carryforward of excess contributions.
Oregon Oregon taxpayers are eligible to receive a state tax credit for contributions to accounts of up to $150 ($300 if filing jointly). The amount the taxpayer must contribute to get the full credit increases based on the taxpayer's income.
Pennsylvania Contributions to Pennsylvania AND non-Pennsylvania 529 plans of up to the gift-tax annual exclusion amount ($15,000 in 2018) per beneficiary are deductible in computing Pennsylvania taxable income. Spouses filing jointly must each have at least $15,000 in income to claim the maximum $30,000 per-beneficiary deduction. 
Rhode Island Contributions to the Rhode Island 529 plan of up to $500 per year (individual) and up to $1,000 per year (married filing jointly) are deductible in computing Rhode Island taxable income, with an unlimited carry forward of excess contributions.
South Carolina Contributions, including rollover contributions, to a South Carolina 529 plan are fully deductible in computing South Carolina taxable income.
South Dakota South Dakota does not have a personal income tax
Tennessee Tennessee does not have a personal income tax
Texas Texas does not have a personal income tax
Utah Contributions to the Utah 529 plan of up to $2,040 in 2020 per beneficiary (individual) and up to $4,080 in 2020 per beneficiary (married filing jointly) are eligible for a 5% credit against Utah income tax. The maximum credit in 2020 is $102 per beneficiary (single) and $204 per beneficiary (married filing jointly). The credit limits are increased each year for inflation.
Vermont Contributions to the Vermont 529 plan of up to $2,500 per beneficiary per year (individual) and up to $5,000 per beneficiary per year (married) are eligible for a 10% tax credit against Vermont income tax. 
Virginia Contributions to a Virginia 529 plan of up to $4,000 per account per year are deductible in computing Virginia taxable income, with an unlimited carryforward of excess contributions. Contributions are fully deductible in the year of contribution for taxpayers at least 70 years of age. Contributions from a non-owner are deductible by the account owner and not by the non-owner/contributor. 
Washington Washington does not have a personal income tax
West Virginia Contributions to West Virginia's 529 plans are fully deductible in computing West Virginia taxable income.
Wisconsin Contributions to a Wisconsin 529 plan of up to $3,340 in 2020 per beneficiary per year (any filing status) are deductible in computing Wisconsin taxable income. The maximum annual deductible will be increased annually to reflect inflation. Contributions in excess of the maximum annual limit may be carried forward to one or more future years and deducted up to the then annual maximum deductible amount each year until all amounts invested have been deducted from Wisconsin taxable income.
Wyoming Wyoming does not have a personal income tax. Wyoming currently does not sponsor a 529 plan.

Source: Savingforcollege.com, 2020



1 Sallie Mae, “How America Saves for College, 2018,” 2018

2 Non-qualified withdrawals are taxable as ordinary income to the extent of earnings and may also be subject to a 10% federal income tax penalty. Such withdrawals may have state income tax implications.

3 Deductions may be subject to recapture if nonqualified withdrawals are made.

4 SavingForCollege.com, “How to Make Sure Your Grandchild’s 529 Plan is Used for College,” 8/12/2019

5 CNN, “The student loan debt is $1.6 trillion and people are struggling to pay it down,” 1/19/20

Before investing, an investor should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s 529 plan.

For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. Hartford Funds Distributors, LLC serves as distributor and underwriter for some 529 plans.

The information cannot be used or relied upon for the purpose of avoiding IRS penalties. These materials are not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, your clients should consult their own tax or legal counsel for advice.

This information should not be considered investment advice or a recommendation to buy/sell any security. In addition, it does not take into account the specific investment objectives, tax and financial condition of any specific person. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. This material and/or its contents are current at the time of writing and are subject to change without notice. This material may not be copied, photocopied or duplicated in any form or distributed in whole or in part, for any purpose, without the express written consent of Hartford Funds.

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