Contributions to 529 college savings programs declined between the end of last year and the beginning of this year as consumers across the board reduced their savings and battled high inflation, according to industry data. But in recent months, contributions appear to be picking up.
State-sponsored savings accounts are named after part of the tax code and can be used to pay for education, mainly college expenses. Money deposited into the account grows tax-free and is withdrawn tax-free when spent on eligible expenses such as tuition, room, food, and books.
In the first three months of the year, estimated net inflows (contributions less withdrawals) into 529 savings plans totaled $1.6 billion, down from more than $3 billion in the same period last year. According to ISS Market Intelligence, a financial research and analysis firm. Still, it’s an improvement over Q4 2022, when net inflows were $1.5 billion. And Q4 inflows were down significantly from the $4 billion-plus in the same period in 2021.
Paul Curley, director of savings research at the ISS, said in an email that the cut in contributions is not only due to lower overall savings and higher inflation, but also that the reopening of the economy after the pandemic has released pent-up spending demand. Said it was the cause.
It didn’t help that last year was a dismal year for investors, including those with money in 529 plans. The losses in 529 plans were especially painful for families with children who are already in or just starting college and have little time to recover their holdings.
“People may donate less when they feel they’re less wealthy,” said Pam Lucina, chief steward of financial services firm Northern Trust.
Curley said this year’s rally in the stock market and slowing inflation have prompted families to put more money into 529.
Last year was “a difficult year,” said Rachel Beer, president of the College Savings Plan Network, a group of state 529 plan administrators. But she added, “I’m sure the donations will come back.”
For example, funding for Nebraska’s 529 program, which Beer oversees as undersecretary of state treasurer, has returned to about the same level as it was a year ago, he said.
Joel Dixon, Global Head of Advice Methodology at Vanguard, said despite market volatility, the fundamental value of 529 as a tax-advantaged way to save money on education hasn’t changed. rice field.
“It still makes a lot of sense,” he said.
At Edward Jones, annual surveys show that respondents want to save for college, but two in three don’t know what a 529 plan is, according to the company’s managed・Steve Ruschhoff, Head of Investments, said:
Overall 529 plan assets, which reflect deposits and investment income, reached nearly $409 billion in the first quarter of this year. While he was down from $432 billion in the same period last year, he was up more than 5% from $388 billion at the end of 2022.
Despite recent market volatility, Bia said the 529 plan offers a way to reduce the amount families have to borrow for college. The College Board estimates that: Average annual cost in state The cost of attending a four-year public college is $27,940, while the cost of attending a four-year private non-profit college is $57,570.
“We still want people to consider 529,” Bier said, adding that most plans have conservative options such as federally insured savings accounts for those who can’t afford the risk. I added that there is.
The College Savings Plans Network works to increase the visibility of college savings plans and has encouraged legislation that expands the use of 529 funds. For example, Congress has expanded authorization to use the 529 Fund to help families save for non-college education expenses, such as kindergarten through 12th grade tuition and apprenticeships. Additionally, up to $10,000 from 529 can now be used to pay off student loans.
Starting next year, under the Secure 2.0 Act enacted in 2022, 529 plan “excess” funds will be able to roll over to 529 beneficiaries’ Roth personal retirement accounts. Lucina said this helps. This is because some families are hesitant to contribute to 529 for fear of paying taxes or fines if they have not used up all the funds in their accounts, for example because their children do not spend the money. go to college — and they withdraw money for other purposes.
“People are worried about overfunding 529,” she says.
Under the new law, up to $35,000 can be transferred from 529 to a Roth IRA. You can transfer up to the maximum annual Roth contribution ($6,500 for him if he is currently under 50) each year. Anything more than that will have to be transferred over several years.
Other rules apply. For example, a 529 account must be open for at least 15 years and cannot transfer contributions or earnings from the last 5 years.
If you still don’t meet the Roth rollover rules, you may be able to avoid paying taxes and fines by changing the beneficiary of your 529 account to a sibling or another family member.
The Roth IRA donates after-tax money. Unlike traditional IRAs, they are not tax deductible. However, when you withdraw your money, you generally don’t have to pay taxes on your earnings.
“Start a healthy habit of donating to your retirement account,” says Lucina.
Here are some questions and answers about College 529 plans:
Can I get a tax deduction for donating funds to 529?
There is no federal tax deduction for 529 donations, but many states offer tax relief.
Do states offer incentives to initiate and fund 529 plans?
Each May, many 529 plans offer promotions and prizes to encourage families to open accounts and start saving for college. For example, South Carolina is offering a $529 grant to parents of babies born in the state on May 29 to fund new FutureScholar 529 accounts. And California is offering her $100 bonus to family members who open a ScholarShare 529 account from May 22nd through her May 31st. A list of state promotions is available on the College Savings Plans Network. website.
What happens if my 529 account runs out of money for my child to go to college?
One option would be to consider using other funds to pay for your first few years on campus, perhaps with student loans, and 529 possessions to recover towards the second half of college or graduate school. Giving time, Bier said. Funds from 529 could potentially be used to pay off loans of up to $10,000.
