When parents or guardians to save for a child’s college education, they use a 529 account. But what if you’re a college student in college or planning to go back to college? Can a 529 savings account help you pay for your education?
Here’s a look at whether getting a 529 account for your education is worth it or not.
What is a 529 account?
“A 529 savings account allows you to build an education fund within an individual investment account,” says Ronald Ramsdell, founder of College Aid Consulting Services. “Money you contribute is invested in one or more specific investment portfolios.”
Essentially, a 529 savings account is a tax-advantaged, long-term investment account that can help savings grow at a low cost.
“The point of 529 Plans is to save on taxes,” says Mackenzie Richards, a certified financial planner (CFP) and investment advisor with San Diego County Credit Union. “Some states offer a deduction for contributions, they grow without being taxed, and any withdrawals used for qualified education expenses are also tax-free.”
Why a 529 account might be right for you
You have a high income and want a tax break
“Most students don’t have sufficient enough income where they need to worry about their own taxes,” Richard says. So opening a 529 account to lessen your tax burden when it’s already minuscule from low earnings won’t make sense.
However, Ben Birken, a CFP with Woodward Financial Advisors in Chapel Hill, N.C., says he could see an advantage to using a 529 account if:
- You have a high taxable income
- You live in a state where 529 contributions are tax deductible
“In that case, money that had been earmarked to pay for tuition could be deposited into a 529 Plan in order to earn the tax deduction,” Birken says. Instead of investing funds and leaving them to grow, you’d withdraw them right away to pay for college costs.
But, he notes, “Given the income profiles of most college students, I would think this would be pretty rare.”
You’re saving to go back to college
A 529 savings account can make sense if you’re using it like most parents do: for long-term college savings.
If a college student knows that graduate school is in their future, Birken says a 529 savings account can be a smart vehicle to work toward that dream.
“In this case, the time horizon for education expenses is longer than just an undergraduate experience,” Birken adds. So you’ll have more opportunities to see savings grow. And you’ll probably be working and get greater benefits from 529 tax breaks.
Why a 529 might not be right for you
A 529 savings account could put college funds at risk
“Although college students can certainly utilize 529 Plans for qualified education expenses (think tuition, fees, and room and board, not Ultimate Frisbee entry fees), it may not be the best decision to open one with your high school graduation money,” Richards says.
That’s because, as an investment account, funds in a 529 are held in stocks. And as with any investment, Richards says, “There is always the risk of your account value dropping.”
If such a drop coincides with the timing for when you’d need to withdraw funds, you could lose money.
“Like any investments, 529 Plans make the most sense when you have time to ride out any short-term volatility in the markets,” adds Richards.
Other accounts could be safer
Because of the potential for monetary losses, a 529 account won’t make sense for short-term college savings.
“By the time tuition is due, we suggest that most of our clients exit almost completely out of stocks in their 529 plans,” says Birken. “The risk of a significant decrease in value right when the funds might be needed for tuition is too great.”
If you’re willing to try and eke out some last-minute gains on college savings in a 529, just be aware of the risks.
Even if you choose to move your money into a more stable asset, Richards says, “it is still smart to keep the education money separate from everything else.”
Look for options to save for college besides a 529, such as a certificate of deposit or a high-yield savings account.
You could qualify for less financial aid
Your assets, including a 529 account in your name, will affect your eligibility for aid.
“I recommend families create the account in the parent’s name,” Ramsdell says. “The three formulas colleges utilize to determine how much financial aid a student may receive will assess students’ assets much higher than the parents’ assets.”
You’ll have to list your financial information and assets on your FAFSA. Therefore, a 529 account in your name could lower the amount of financial aid you’re granted more than if your parents held it.
Overall, a 529 account might not be beneficial for most college students. But for students interested in working through college or saving for a degree they won’t start for a few years, a 529 account might be the right choice.
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