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Two-thirds of parents are not establishing 529 college savings accounts

The majority of parents are not utilizing 529 plans to save for their child’s future college education. Recently, financial website WalletPath conducted a survey in the United Sates and found that 68% of respondents either don’t have nor do they plan on establishing a 529 college savings account for their child or children (Figure 1). In contrast, 84% of respondents strongly believe in the value of a 4-year college education. This paradox may be rooted in the fact that this cohort is weary of the staggering costs of higher education with 78% stating that the financial return of a 4-year college education is in question. Awareness is certainly a factor to explain why parents may not be establishing 529 accounts for their children with 20% of respondents stating they were unaware of this type of savings vehicle. Alternatively, 12% of respondents stated that they have established alternative means of assisting with college expenses while 22% were unable to financially contribute to 529 accounts.

 

Figure 1 – Infographic displaying the survey results finding that 68% of respondents either don’t have nor do they plan on establishing a 529 college savings account for their child or children.

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Who’s establishing and contributing to 529 accounts?

According to this WalletPath survey, parents of the child opened the account 46% of the time while grandparents or a family member established the account 26% of the time (Figure 2). Families see funding college education as a shared responsibility and a recent study by the College Savings Plans Network (CSPN) corroborates these findings. Recently, the CSPN study showed that more parents and grandparents are opting to stash their money in 529 plans than ever before. By the end of 2015 there were 12.5 million active 529 accounts in the U.S., compared to 12.1 million accounts just one year earlier. And 55% of these accounts received contributions in 2015, up from 53% in 2014. Interestingly, out of those that established a 529 account, only 61% opened the account prior to age 3. Initiating the account as early as possible is essential when utilizing these 529 accounts as a savings vehicle for college. Considering these accounts have roughly an 18 year window to grow, opening the accounts as early as possible may make a meaningful impact to this college nest egg.

Figure 2 – Distribution of party responsible for opening a 529 account

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Background:

The staggering costs of higher education are creating a financial barrier to entry for many families. These financial hurdles are at the forefront of parents with young children. Contending with these high costs are challenging for many families that believe paying for these higher education costs is a shared responsibility between the parents and their future college student. Devising a long-term strategy is essential in mitigating the impact of these future higher education costs and subsequent student loan debt. One of the most popular means for earmarking and investing money for future college expenses is in the form of a 529 college savings account. 529 college savings accounts have gained in popularity over recent years. In 2015 alone, net assets reached $253 billion compared to $157 billion just 5 years prior in 2010 for a 60% increase (Figure 3).

Figure 3 – Assets invested in 529 plans since inception

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What are 529 college savings plans?
 

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college expenses. 529 plans are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code which created these types of plans in 1996, hence the name 529 plan. There are two types of 529 plans: pre-paid tuition plans and college savings plans. All states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a pre-paid tuition plan.

 

Advantages of 529 college savings accounts

529 plans offer federal and state income tax breaks:

  • Contributions are not deductible however earnings in a 529 plan grow federal tax-free and will not be taxed when the money is withdrawn and used for college related expenses.
  • In addition to the federal tax savings, 34 states, including the District of Columbia, currently offer residents afull or partial tax deduction or credit for 529 plan contributions.
  • If your state is a tax neutral state thus doesn’t offer tax benefits to residents, you can choose any other state’s plan.
  • Account holder will not receive a Form 1099 to report taxable or nontaxable earnings until the year you make withdrawals.
  • Only the earnings portion of a non-qualified withdrawal is subject to a 10% withdrawal penalty
  • Contributions will never incur penalty
  • Deposits limits to a 529 plan are up to $14,000 per individual per year ($28,000 for married couples filing jointly).
  • Non-qualified withdrawals will render your 529 plan a taxable account.

Account holder retains control of the 529 account:

  • The named beneficiary (i.e. child) has no legal rights to the funds so you can assure the money will be used for its intended purpose.
  • A 529 account owner can withdraw funds at any time for any reason — but keep in mind that the earnings portion of non-qualified withdrawals will incur income tax and an additional 10% penalty tax.

Anyone can take advantage of a 529 plan:

  • UnlikeRoth IRAs and Coverdell Education Savings Accounts, 529 plans have no income limits, age limits or annual contribution limits.
  • There are lifetime contribution limits that vary by plan, ranging from $235,000 – $400,000.

Exceptions to the 10% penalty tax rule:

  • If the beneficiary dies or becomes disabled
  • If the student decides to attend a U.S. Military Academy
  • If the student receives a scholarship
  • In all of these cases the earnings portion of the withdrawal will incur income tax.

Qualified withdrawals include:

  • Tuition and fees
  • Books
  • Equipment required for course enrollment (including special needs equipment)
  • Some room and board expenses
  • Non-qualified withdrawals include:
  • Transportation costs
  • Computers (unless the school requires them)
  • Student loan repayments

In the event your child does not attend college or receives a scholarship:

  • Change the beneficiary to another qualifying family member
  • Hold the funds in the account in case the beneficiary attends graduate school
  • Make yourself the beneficiary to further your education
  • The10% additional federal tax penalty is waived when scholarships are the reason for withdrawing funds
  • The scholarship has rendered your tax-free 529 investment into a tax-deferred 529 investment
  • Parents can still use their entire 529 balance on other non-scholarship expenses and not limit the tax benefit of the 529 plan

Takeaways:

  • 63% of respondents either don’t have nor do they plan on establishing a 529 college savings account for their child or children.
  • 82% of respondents strongly believe in the value of a 4-year college education.
  • 78% stated that the financial return of a 4-year college education is in question.
  • 22% of respondents stating they were unaware of this type of savings vehicle.
  • 13% of respondents stated that they have established alternative means of assisting with college expenses.
  • 19% were unable to financially contribute to 529 accounts.
  • Parents of the child opened the account 46% of the time.
  • Grandparents or a family member established the account 26% of the time.
  • Out of those parents that established a 529 account, only 61% opened the account prior to age 3.

Summary:
A recent survey conducted by financial website WalletPath found that 68% of respondents either don’t have nor do they plan on establishing a 529 college savings account for their child or children, while 84% of respondents strongly believe in the value of a 4-year college education. This lack of correlation can be partially attributed to lack of awareness as 20% of respondents had not heard of this plan while 22% were unable to financially contribute. The 529 college savings plan may be one of the most effective means for saving money for college expenses. Establishing 529 plans are rising in popularity for both parents and grandparents as they were responsible for opening accounts 46% and 26% of the time, respectively. Contending with the staggering costs of higher education are challenging for many families however devising a long-term strategy (i.e. 529 plan) is essential in mitigating the impact of these future higher education costs and future student loan debt.

Methodology:
WalletPath conducted a 11-question survey to understand parents’ willingness, habits and feelings towards college savings habits, particularly 529 plans. This survey was conducted online within the United States by SurveyMonkey on behalf of WalletPath on June 28, 2016. These data were based on a subset of 1,000 parents ages 18 to 44 spanning a broad range of income and education ranges.