529 Plans: How Much Should I Contribute?

I frequently get asked about college 529 savings plans.   The question I usually get asked is: how much should I put into my kid’s 529 Plan each month?  The question clients should be asking is: SHOULD I contribute to my kid’s 529 plan each month?

Let’s start with the basics*.  529 plans are sponsored by each state – each plan has its own set of investment options to choose from.   Any gains on those investments are not taxed while in the plan***.  If used for most college expenses, withdrawals are also tax-free.

You can use 529 funds at ANY college or university in the country – you are not limited to only the schools in your state.  The new Trump tax bill has authorized that 529 funds can also be used for elementary or secondary education as well*.  Some states allow contributions to be deducted from state taxes – an added bonus if you are a resident of that state.  What’s not to like?

What I often see is that parents will contribute to a 529 Plan at the expense of their own retirement savings.  We want to see both parents well on their way to their retirement goals before making a serious monetary commitment to a 529 Plan.  For instance, are both parents “maxing out” their 401k or other employer sponsored retirement plan annually?  Are both parents contributing the maximum amount into an IRA (or ROTH) annually?  Too often we see retirees who have paid for a child’s entire education but have fallen short of their own retirement goals.

Remember, any withdrawals from a 529 plan NOT used for education expenses may incur a 10% penalty and you will have to pay taxes on any gains.  You may also have to pay back any tax deduction received from your state.  Lets take a look a few reasons why your child may not need 529 plan funds:

  • child gets a job out of high school and does not go to college
  • child decides to learn a trade instead of go to college
  • child gets a scholarship to college

Most people forget that their child can always apply for federal/state aide when applying for college.  Private and public loans can easily fill the gaps between aide and need.  In short, your child has many options to “self-fund” college if they decide to attend.

Nonetheless, it certainly does not hurt to open a 529 account in each child’s name.  Birthday/holiday monetary gifts can be deposited and allowed to grow within the account.  However, parents should take a serious look at their own retirement picture before committing to a large monthly deposit into a 529 plan.

Charles Brown is a Portfolio Manager and Financial Advisor at M. Brown and Associates in Naperville, Illinois



***Please consult an accountant regarding your own tax situation

****The above article is informational in nature only and is not a recommendation to buy or sell securities.  All information is gathered from sources believed to be reliable, but neither Charles Brown nor Ausdal Financial Partners, Inc guarantees the accuracy of the information.  All investments carry a degree of risk.  Individuals should consult with their tax and investment professionals before making changes to their investment portfolios.

*****Securities and Investment Advisory services offered through Ausdal Financial Partners, Inc, 5187 Utica Ridge Road, Davenport, IA 52807 (563)326-2064. Member: FINRA/SIPC. M.Brown and Associates and Ausdal Financial Partners are independently owned and operated