Family Wealth Management: 529 Plan Errors to Avoid

By Teresa Conley | October 05, 2017

Getting a secondary education is more important than ever — and more expensive than ever.  2013 research from the Economic Policy Institute indicates that workers who hold a four-year degree make, on average, 98 percent more per hour than workers who don't have a college degree. That translates into an average of $500,000 more in earnings over a lifetime.

Teresa Conley is a CFP, Certified Financial Planner and a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt County

But college isn't cheap; data from the College Board indicates that the average annual cost of tuition/fees and room/board

at a public university is $18,943 (for in-state students) and $32,762 for out-of-state students, while private schools cost an average of $42,419 per year... and that's not even counting textbooks and other incidental costs.

Many families choose to save for their child's college education using a 529 plan. These simple savings account offer many benefits, including potential tax breaks, but there are a few common mistakes to avoid. Family wealth management advisors share what you need to know about avoiding 529 plan errors.

Investment Guidance: Don't Set it and Forget it

529 educational savings plans may seem like the type of investment that you simply set up then don't think about again until it's time to send the kids off to college. However, they actually need some care and tending to succeed. 

Start by determining exactly how much you want to save and set a goal. Remember, you can generally use 529 plan funds to pay for qualified higher education expenses as defined by the IRS such as:

  • Tuition
  • Fees
  • Some room and board
  • Required textbooks

Teresa Conley is a CFP, Certified Financial Planner and a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt CountyWhen creating your 529 goals, estimate the costs associated with these expenses. Check with your child's educational institution to determine exactly what's covered; if the funds are used for unqualified costs, you might trigger a tax penalty. 

Family Wealth Advisors Suggest Defining the Account Owner

It may seem intuitive to name your child or grandchild as the owner of the 529 account; after all, they're the ones using the funds. But naming the student as the account owner may disqualify them from receiving some financial aid benefits, as they'll also be the owners of the assets that come along with the account. 

Instead, name the student as the beneficiary of the account. That way, the 529 funds won't impact their ability to receive financial aid. 

In Case of Emergency: Don't Raid the 529 Plan

When financial challenges arise, it can be all too easy to view the 529 account as an emergency fund. After all, students can simply take out student loans... right? Indeed, members of the class of 2015 graduate with an average student loan debt of just over $35,000... a burden that can make getting ahead financially take just that much longer. 

Debt issues aside, borrowing from the 529 plan will result in tax burdens for you. Using funds for unqualified expenses may mean that you incur a 10 percent penalty, as well as paying federal income tax on the money. Plus, withdrawing means you'll lose out on the chance to gain potential interest on capital. 

Wealth Advisors Suggest Continuing the 529 Plan

Should you stop contributing to a 529 plan once your student is attending college? You may want to continue throughout the college years, as there may be tax deductions associated with 529 contributions. Plus, you can use this tax-free savings to pay for future educational expenses. 

Speak with your trusted family wealth management advisor about how you can put a 529 plan to work for you and your student.


Posted in Financial Planning, Investment Guidance