According to industry data, contributions to 529 college savings programs fell late last year and early this year as consumers saved overall less and grappled with high inflation. But contributions seemed to be picking up again in recent months.
The government-sponsored savings accounts, named after a section of the tax code, can be used to pay for educational expenses, especially college tuition. Money deposited into the accounts grows tax-free and is withdrawn tax-free when spent on eligible expenses such as tuition, room and board, and books.
According to ISS Market Intelligence, a financial research and analysis firm, estimated net flows to 529 savings plans (deposits minus withdrawals) totaled $1.6 billion in the first three months of the year, down from more than $3 billion in dollars in the previous year. Still, that was an improvement from the fourth quarter of 2022, when net inflows were $1.5 billion. And those fourth-quarter inflows were significantly less than the $4 billion-plus for the same period in 2021.
The fall in premiums is not only a result of lower overall savings and high inflation, but also the post-pandemic reopening of the economy, which released pent-up demand for spending, Paul Curley, director of savings research at ISS, said in an email.
It didn’t help that last year was a dismal year for investors, even those with money in 529 plans. The losses on 529 plans were painful, especially for families with children who were already enrolled or just starting college and had little time to recover their holdings.
“People may give less if they feel less affluent,” said Pam Lucina, chief trustee of Northern Trust, a financial services firm.
The stock market’s gains this year, along with slowing inflation, have encouraged families to put more money into 529 bonds, Curley said.
Rachel Biar, chair of the College Savings Plans Network, a group of state 529 plan administrators, said last year was “a challenging year.” But she added, “We’re seeing the posts coming back.”
For example, contributions to Nebraska’s 529 plan, which Ms. Biar oversees as the state’s assistant treasurer, have increased to almost the same level as a year ago, she said.
Despite the market volatility, Joel Dickson, Vanguard’s global head of advisory methodology, said the fundamental value of 529 bonds as a tax-deferred way to save for education hasn’t changed.
“It still makes a lot of sense,” he said.
At Edward Jones, the annual survey shows that while respondents want to save for college, two in three don’t know what a 529 plan is, said Steve Rueschhoff, head of managed investments at the company.
Overall, 529 plan assets, which reflect deposits and investment gains, reached nearly $409 billion in the first quarter of this year — down from $432 billion a year earlier, but up more than 5 percent from $388 billion at the end of 2022 .
Despite recent market volatility, 529 plans offer families a way to reduce the amount they have to borrow for college, Ms Biar said. The College Board estimates that the average annual cost of attending a four-year public college in the state is $27,940, while the cost at a four-year private nonprofit college is $57,570.
“We still want people to think about a 529 plan,” Ms. Biar said, adding that most plans offer conservative options, including savings accounts that are federally insured, for people who can’t tolerate risk.
The College Savings Plans Network has worked to raise awareness of college savings plans and has sponsored legislation that expands the allowable uses for 529 funds. For example, Congress has expanded the allowable use of 529 funds to allow families to save for educational expenses other than college, such as school fees. B. Tuition fees for kindergarten through 12th grade and for apprenticeships. Also, up to $10,000 from a 529 can now be used to pay off student loans.
Beginning next year, under the Secure 2.0 Act, which came into effect in 2022, “leftover” funds in a 529 plan can be transferred to an individual Roth retirement account for the beneficiary of the 529. This is helpful, Ms Lucina said, as some families may be reluctant to contribute to a 529 account for fear they will owe taxes and a penalty if they have not spent all of the balance in the account – for example because their child does not go to college – and withdraw the money for other purposes.
“People worry about the 529 being overfunded,” she said.
Under the new law, up to $35,000 can be transferred from a 529 IRA to a Roth IRA. You can send up to the annual maximum Roth contribution – currently $6,500 for those under 50 – each year. If you have more left, you must carry it over a period of years.
Different rules apply: for example, the 529 account must have existed for at least 15 years and no contributions or earnings from the last five years can be carried over.
However, if you do not follow the rules for a Roth rollover, you can avoid paying taxes and penalties by switching the 529 account beneficiary to a sibling or other family member.
With Roth IRAs, you donate money after taxes – you don’t get a tax deduction like with a traditional IRA. However, when you withdraw money, you usually don’t have to pay taxes on the earnings.
“It creates healthy habits of putting money into a retirement account,” Ms. Lucina said.
Here are some questions and answers about College 529 plans:
Can I get a tax deduction if I deposit money into a 529?
There is no federal tax deduction for 529 contributions, but many states offer tax breaks.
Do states offer incentives for opening and funding a 529 plan?
Each May, many 529 plans offer promotions and prizes to encourage families to open accounts and start saving for college. South Carolina, for example, is offering $529 in grants to parents of babies born in the state on May 29 to fund new FutureScholar 529 accounts. And California is offering a $100 bonus to families who open a ScholarShare 529 account May 22-31. For a list of state specials, visit the College Savings Plans Network website.
What happens if my 529 account loses money while my child is in college?
One option is to consider using other means — such as taking out student loans — to fund the early years on campus to give the 529 stock time to recover for later college or graduate years. said Mrs. Biar. The 529’s funds could potentially pay off up to $10,000 in loans.