Madison Aument
For 91.9 KVCR News, I’m Madison Aument. This is Economics IE. With students returning to school, parents might be worried about saving for their child’s college fund. I spoke with Bob Petix with Wells Fargo, who says 529 accounts are a heavy-weight for college savings. For those who don't know: what is a 529 account?
Bob Petix
A 529 account is basically an education savings program that is tax-advantaged. I think the origin of this came from the fact that for many, many years, the cost of higher education outpaced the rate of inflation, which was a source of difficulty for a lot of parents and grandparents who were interested in sending their children to college. The 529 plan is a savings plan that allows parents and grandparents and others… It's not limited to that… to be able to save in a tax-advantaged way for college and other educational expenses. And it’s done in a way that you can have tax free accumulation, and you can also have tax free distributions, which is about as good as it gets.
Madison Aument
Can you talk a little bit more about what it means to be a tax-advantaged program?
Bob Petix
The contributions to a 529 are not tax deductible, as would a contribution to a charity would be tax deductible for income tax purposes. However, any kind of earnings that occur while the the while the investments are in this 529 account do grow tax free, similar to an IRA, in the sense that you can make any kind of contributions made to an IRA would grow income tax free, but also, in the case of qualified education expenses, any distributions out Of the 529 plan, unlike an IRA, are also income tax free. So as long as they're used for qualified education expenses, then not only is there income tax free growth of the 529 but the actual distributions from the 529 plan are also income tax free.
Madison Aument
What's your advice to a parent or a grandparent that might be looking to open one of these accounts?
Bob Petix
Well, obviously, it's clear that you have to be able to set aside the funds, but I would say… there's no minimum on what you can contribute to a 529 plan. So if you're able to put aside some money to save for college, and that's something that's of interest to you, then I think it's extremely advantageous to use this method to save for college. Now there are other ways one can save for college, but because of the tax advantages that we just discussed, to my way of thinking it's the most… you get the most bang for your buck. No amount is too little, in my view, to set aside for a 529 plan, and others can contribute to the 529 plan. So for example, suppose you have a child and you can afford to set aside…not the the full annual exclusion, which, again, if you're married, is $36,000 in 2024… but let's say you can set aside $5,000. That's perfectly fine. Others can contribute to that 529 plan, and so that can continue to grow. So even a little to my way of thinking is a great idea. The other thing that you need to keep in mind is that with respect to the financial aid form that one has to fill out beginning this year… if a grandparent creates a 529 for the benefit of a grandchild, that does not count toward the assessment as to eligibility for financial aid. Now, if a parent establishes a financial 529 then it does count. But then in the case of a grandparent, it does not. That's a new innovation this year. So something to keep in mind is it may be advantageous for a grandparent to establish the 529 account, so as not to displace eligibility for financial aid under the FAFSA.
Madison Aument
Thank you for your time.
Bob Petix
My pleasure. Thank you for having me
Madison Aument
Join us again next Monday for Economics IE. You can find this segment and others on our website at kvcrnews.org/econie. Support for this segment comes from the Nowak Family. For KVCR News, I'm Madison Aument.