Studying up on 529s

If you’re planning to help cover a loved one’s college expenses, a 529 college savings plan can be a smart way to help prepare and start saving money. These flexible, tax-advantaged accounts are specifically designed for education savings and offer several key benefits:

• Tax-deferred earnings – Any investment earnings grow tax-deferred while the money remains in the account.
• Tax-free withdrawals – Funds can be withdrawn tax-free when used for qualified education expenses.
• Minimal impact on the student’s financial aid eligibility – Because 529s are considered parental assets, they have a relatively small effect on a student’s federal financial aid eligibility.¹

There are also other ways to save for college, such as a high-yield savings account, which you may think would offer you more flexibility and ease of use. After all, what happens if your child doesn’t end up going to a traditional university?

Fortunately, 529 plans offer several options if the plan changes. You can: 

• Change the beneficiary to another eligible family member at any time without tax consequences. The IRS has a broad definition of family, including other children, siblings, parents, grandparents, in-laws, nieces/nephews, and cousins.²
• Use it for trade schools, apprenticeships, and vocational training as long as the institution is eligible for Title IV federal student aid. 529 funds can be used for a wide range of education expenses, including college expenses at postsecondary schools nationwide, tuition for K-12 schools, and certain apprenticeship costs.
• Withdraw contributions tax- and penalty-free. Any earnings can also be withdrawn but are subjected to federal income taxes and a 10% penalty.
• Transfer unused funds into a Roth IRA for the beneficiary. This transfer can be tax- and penalty-free if:
  • The account has been maintained for the beneficiary for at least 15 years,
  • The transfer amount must come from contributions made to the 529 account at least 5 years prior to the transfer date,
  • The Roth IRA must have the same beneficiary as the 529 account from which the transfer is made,
  • The beneficiary has earned income equal to the transferred amount in any year,
  • The amount transferred from a 529 account to a Roth IRA in the applicable year, together with all other contributions in such year to IRAs for the same beneficiary, must not exceed the Roth IRA annual contribution limit applicable to such beneficiary,
  • The aggregate amounts transferred from 529 accounts to all Roth IRAs must not exceed $35,000 per beneficiary.

These features can make 529 plans a compelling option for education savings. Unlike traditional savings accounts, which are more vulnerable to inflation and offer no tax benefits, 529s are built to support long-term educational goals.

If you decide that a 529 plan may be the right choice for supporting your child’s future education, it’s important to then determine if you want to choose the prepaid tuition route or opt for an education savings plan.

Looking ahead, using the College Savings Calculator can help you evaluate if you’re on track for paying for your beneficiary’s education. If you need assistance paying off existing student loans, check out HPE’s Student loan support resource for help.

¹Asset ownership can impact federal financial aid eligibility since the Student Aid Index (SAI) formula weighs student and parent assets differently. Accounts that are considered assets of the child can have a greater effect on federal financial aid eligibility.

²The new beneficiary must be an eligible family member of the original beneficiary to avoid federal income taxes and the 10% federal penalty. A family member is a person who has one of the following relationships with the original beneficiary: (1) son or daughter; (2) stepson or stepdaughter; (3) brother, sister, stepbrother, or stepsister; (4) father, mother, or an ancestor of either; (5) stepfather or stepmother; (6) son or daughter of a brother or sister; (7) brother or sister of a father or mother; (8) son or daughter-in-law, father or mother-in-law, brother or sister-in-law; (9) spouses of the individuals listed in (1)–(8) or the spouse of the beneficiary; and (10) any first cousin. Note that a new account will be required in order to change the beneficiary.

Federal tax law allows one 529 account per beneficiary to be rolled over in any 12-month period without changing beneficiaries.

For more information on qualified education expenses, including K-12 expenses, apprenticeship costs, postsecondary credential expenses, and student loan repayments, please see a 529 Plan Fact Kit.

Investing involves risk, including risk of loss.

Units of the portfolios are municipal securities and may be subject to market volatility and fluctuation.

Please carefully consider the plan's investment objectives, risks, charges, and expenses before investing. For this and other information on any 529 college savings plan managed by Fidelity, contact Fidelity for a free Fact Kit, or view one online. Read it carefully before you invest or send money.

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