Using a 529 Savings Plan For Adult Education
John Madison’s story isn’t typical. When the time came time to pay for his daughters’ college educations, the Virginia-based certified financial planner found himself with a surplus of 529 savings plan funds. Assuming that his youngest child doesn’t use the remainder, Madison has his own plans. “I've already begun researching additional professional education and certifications,” he said. “Many universities and colleges offer certificate programs that would enhance my knowledge, and I could transfer my daughters unused 529 balance to an account on which I am the beneficiary.”
The national cost of postsecondary education is rising, but there’s good news for Washington residents: In-state tuition and fees have decreased 16 percent over five years, according to data from College Board's "Trends in College Pricing 2017" report, easing the financial burden of pursuing a graduate degree as a working adult. Even so, the average annual costs for Washington students for the 2017-18 school year was around $10,000, and a 529 college savings plan can help to offset some of the costs.
What is a 529 savings plan?
A 529 plan is an investment vehicle used for qualified education expenses. While usually aimed at helping parents plan for their child’s education, any investor who is at least 18 years old and have a Social Security Number may open an account for themselves or a relative. The main benefit of a 529 plan is the tax break: The Internal Revenue Service notes that 529 earnings are not federally taxed, and Washington residents are not subject to state tax, which means that money spent on tuition, room and board, and other qualified expenses is tax-free under 529 plan rules, and there are plenty of options to choose from. Investment research company, Morningstar, provides annual ratings for 529 savings plans based on a variety of performance factors.
Becoming the beneficiary
In addition to the tax benefits, an attractive feature of 529 savings is the plan owner’s ability to change beneficiaries—usually once a year—to another family member or even themselves. For parents whose children have completed college or chosen not to attend, using remaining 529 funds is an option, but not one that certified financial planner Robin Tan of Kirkland often sees utilized. “I have seen leftover 529 funds, but that doesn’t happen very often. And in the situations where there were leftover funds, the parents haven’t used them.”
Why not?
“Not using funds isn’t that rare, especially for wealthy families,” Tan said. “Some of them fund 529 plans with the intention of passing them down from generation to generation because they grow tax-free.”
While leaving an inheritance is tempting for close-knit families, it may not be the most fiscally sound decision according to a 2017 CareerBuilder survey, which found that 33 percent of employers are hiring candidates with master’s degrees for roles that were once held by those with four-year degrees. “As a society, we’ve entered a new world of work where job requirements are constantly changing and the need to upskill is a must,” said Rovy Branon, vice provost of the University of Washington’s Continum College. With these factors in mind, it’s important to consider the long-term familial benefits of using 529 funds for career and income growth.
Opening a new account
Professionals who purAccording to the Financial Industry Regulatory Authority (FINRA), “If you are considering going back to college or graduate school, you can open a college savings plan for yourself. You will save on taxes, and if you end up not going to school, you can always transfer the money, tax-free, to another 529 plan for your children or spouse.”
Tan suggests using this option requires time and foresight. “If you’re in your 30s and say, ‘Well, when I’m 45 I’m going to pursue my MBA,’ it’s worthwhile in that situation, but most people don’t think that way.” Tan said. “Let’s say you put $20,000 into a 529 plan and you need it in three years. You wouldn’t put all your money into an aggressive stock mutual fund because if the stock market were to drop, say, 20 percent in the second year, then the money you had for college is down. And while you might get a tax break, that only applies to 529 earnings, and you might not have any after only three years.”
Tan recommends a growth period of at least seven years to ensure a worthwhile return with a mixed bag of investments that matches your risk tolerance, much like investing in retirement plan. Like any other 529 plan, any funds that you don’t use may be transferred to a relative, including children. “The 529 plan is just a vessel; it’s what you put into it that’s important.”
Sidebar: What Does a 529 Plan Cover?
529 savings plans cover these qualified education expenses:
- Tuition and fees for any college or educational program eligible to participate in a student aid program administered by the U.S. Department of Education
- Textbooks and required reading course materials
- Room and board, up to your school’s “cost of attendance” limits, including dorm fees, an apartment rental or mortgage payment if the beneficiary is a homeowner
- Computers, tablets, printers and software needed by the beneficiary
- Special needs equipment
Depending on the plan, withdrawals that aren’t used for qualified education expenses are subject to a 10 percent penalty, federal and state taxes. Contact your plan distributor or your college’s financial aid office for more information.