There he is. We have two little boys.
I want the best for the kids as they grow up.
Parents are telling us that the number one savings goal that they have is for college.
We have two 529 accounts for both boys.
I was surprised by the flexibility of a 529.
529's are not just for college anymore.
Why is education important to you?
I think education is sort of that investment in the future. We've decided to at least get started because there's a long way to go. Hey, Bud.
Mama.
[MUSIC PLAYING]
Room, board, tuition fees-- college doesn't come cheap, and figuring out how to pay for it can get stressful. But hopefully, this conversation can help. Hi, welcome to Money Unscripted, a podcast from Fidelity Investments. I'm Ally Donnelly.
Today, we're talking about 529 accounts, a tax advantaged way to save for education expenses. How do they work? When's a good time to start saving? And what happens to your money if your child doesn't go to college? Don't worry, there are options.
But before we explore those, let me introduce you to Taylor and Samir, two working parents with two young boys. They want the best for their kids. And for them, that includes money to help pay for their education, even if they don't know exactly what the future holds.
High five. Good job.
I have two little boys, two careers, a dog, a house. So the days are full. I couldn't actually tell you what happens.
I got you.
Ready to go to school?
I think of it as organized chaos. It's chaos, but there's two of us. And obviously, that makes it easy.
Easier.
Easier.
[LAUGHS]
What are we making here?
Zain is five, and Reid is two. They're a ton of energy.
You're raising a young family. It's expensive.
Do you want to help me make a garage again, bud?
Talk to me about the costs you're juggling.
There are the obvious costs, right? There are the diapers. There's the food for two boys, which is adding up quick.
Daycare cost, mortgage.
There's costs of preschool. There's after school.
Car payments, student loans. You still have to have some type of quality of life.
Just-- it's a lot.
[INAUDIBLE]. Where's Z?
Also, trying to save for when the boys go to college, which feels really far away.
What do you want for them as they grow up?
We want to give them options, right? Options to do what they want, to lead a life they want.
They can go to school. They can go to trade school. But ultimately, for them to be happy, fulfilled in what they choose to do.
Both Taylor and Samir are grateful for their own upbringing and the example set by their parents.
I emigrated with my parents from Morocco for better opportunities. And that opportunity for me was a college education.
I think I grew up in a loving home with a really strong work ethic, and that has sort of translated into how we think about planning. I think education is sort of that investment in the future.
When did you open a 529 for your first son?
So kind of embarrassing, but we opened a 529 before we had kids, before we were pregnant. All the things-- at the time, it made sense. And then the flip of it is our second child, I just opened his 529. So someday they'll watch this and probably not like that answer.
What was it for you that you felt you really needed to start early?
I think we-- some part of us having been paying our own student loans month in and month out and seeing all that interest, that was sobering.
I want them to do better in the context of not thinking about those payments, just to set them up.
We're getting there.
The couple has made education goals part of their regular financial plan. They decided to automate their contributions to the boys' 529 plans and give their parents and other family opportunities to contribute at birthdays and holidays as well.
Obviously, we love toys. We love gifts. But there's just an excessive amount of things that we just obviously don't need.
Good day for the park.
How does it make you feel to have these plans started for your kids?
Relieved. Relieved.
I don't know which way college is going. If we can't pay for all of it, that's fine. I don't think there's any shame in that. I just want to know that we tried.
There you are.
We're doing this for them, for them to have choices. I want them to have an education that gives them freedom to make whatever decision is going to make them happy.
Thank you. I love you.
Young families like theirs have so much going on, it can be hard to prioritize that savings. So let me bring in Cory Latham. He's a managing director here at Fidelity. And he's going to go through all things 529 for us. Cory, thanks for being here.
Thank you for having me here today.
With the cost of college and everything going on with the student debt crisis, what do we know about where college is falling in the list of family's priorities?
I agree there's a lot of priorities that families have-- young families, all families. And what we're actually hearing is that it's the top priority. So based on our 2024 College Savings Indicator Study that we did at Fidelity, parents are telling us that the number one savings goal that they have is for college. And while the study found that 74% of parents are already saving for their children's education, families are only on track to cover about 30% of anticipated college costs.
All right. To that end, let's start with the basics. What is a 529, and who can open one?
Yeah. So a 529 plan, it's a tax-advantaged account that can be utilized to pay for qualified higher education expenses. And any earnings in that account, they grow federally tax-deferred. And if they are utilized for a qualified education expense, the distributions in that account are going to be federally tax-free. So it's a good benefit if you're going to be using it for one of those expenses that would be deemed as qualified.
And you ask me who can open it up. Typically, you're going to see a parent opening it up on behalf of a child, but anybody really can. So you could have a parent or a grandparent or an aunt or an uncle. Anybody who wants to open up that account is eligible to do it on behalf of that beneficiary.
It's an investment account. So why would I want to consider a 529 over, or in addition to, a brokerage account?
Yeah. The biggest benefit you're going to get out of that 529 is that tax-deferred growth in the tax-free withdrawals, as long as it's utilized for that qualified expense. So it's good to know-- and I know we'll touch on it-- as what those expenses are. So you see that it's very broad. Where there are benefits to a brokerage account, but you really want to take advantage of that tax-deferred growth and the tax-free withdrawals if you do want to use it for those higher education expenses.
You mentioned those qualified education expenses. I was actually really surprised about the flexibility of how much it can pay for. So run me through those.
Yeah, it's not just for college anymore. And I think a lot of folks, when you think about 529, you'll hear us say college. But it's a lot broader than that. I will start with some of the college expenses that it is probably the most typical one, though.
So you have things like college tuition and fees, room and board, books, computers, supplies, those types of things. Other typical ones you might not know about is off-campus housing or off-campus meal plans. All of those would qualify.
But there's other benefits to the distributions that you can take advantage of. So one of them is for K through 12, you can use up to $10,000 per year on a tuition. For a student loan, you can use up to $10,000 towards that student loan payment, but that's over the lifetime of it.
And another big one that's kind of played a bigger role when it comes to 529s recently is trade schools and apprenticeship programs. So there's a big need out there for people in the trades and for those folks that would benefit from an apprenticeship program.
And that's what we've seen with 529s that as the workforce has changed, and really as the college journey has changed for a lot of folks. It's not just after college-- four years and you're done. These plans have become a lot broader in what they can be used for, so that they're actually meeting the needs of the beneficiary that they're set up for.
And I know you talked about trade schools, but does it have to be a traditional four-year institution?
It does not. So you can look at things such as a community college, if you're just going to take a class at a time. There's all kinds of different ways it can be used. You just want to make sure that before you're signing up for it, if you want to use it with your 529 plan, you just want to make sure that that certain program or class would qualify.
OK. I want to stay with the flexibility for a second because not every kid wants to go to college or is going to go to college. So if I've saved up that money in my 529 account and my child doesn't go or perhaps gets a scholarship or something like that, do I lose that money?
You don't. And I think we all hope that our kid is the one who gets that nice scholarship package and is able to go to school with it. I know that that's our dream. But we know that hope is not a strategy. But there are other ways that it can be utilized.
So say that they get-- like, they get a full scholarship, or they try to go to the military. Then there are advantages where you'd be able to take that money out and not have to pay a penalty on it.
The two most common ones right now that we think about, though, are the ability to change a beneficiary, or the ability to transfer it to a Roth IRA. So the changing of a beneficiary, you would think about it as if I have multiple children, and I have multiple 529 accounts set up for them.
Say, my first child goes to school, doesn't use it. Well, I can change the beneficiary of that first account to the other child, or one of the other children, and that can be used for their higher education expenses. So that's one of the bigger benefits that's been in place that you see parents utilizing.
Let me bump in there for a second. Even if I already have a 529 account established for that second child, I can move that money into it?
Yeah. There are no limits to the amount of 529s you could have. So typically, you could say a grandparent or an aunt and uncle could have one, as well as a parent could have one. So you absolutely can do that. Yep.
All right. Now let's go back to the Roth.
There's also the option now of transferring it into a Roth IRA. It does have certain conditions that need to be met. So the first thing is the account has to be open for 15 years in the name of the beneficiary. It's a maximum of $35,000 for the lifetime. Any contributions made to the Roth have to stay within the maximum limit of that year. So you can't do all $35,000 at once. And any contributions made to the 529 within the last five years, those would be ineligible to be transferred over to the Roth IRA.
OK. All right. So what if I have that 529 account established, and I've got money in there, but I need it. I need the money, and I want to take it out. What happens then?
Yeah. You can always take it out. So there's nothing that's saying that it has to stay in there. But if you do, you would be subject to a 10% penalty if it's something for a nonqualified. And you also could be subject to any taxes that would be due on the earnings within that account.
OK. Again, a 529 account is one vehicle. And so if I'm looking at financial aid, how does having a 529 account or the amount of money in it affect financial aid.
Yeah. This question comes up all the time. I think federal aid can be a confusing process for a lot of individuals. I know they're trying to make it a lot easier, but there's a lot that goes into it. The easiest way to think about 529 when it comes to any financial aid is that it's considered a parental asset.
And currently, right now, the way that financial aid is set up at the federal level is that would count towards 5.6% towards the financial aid package. Compare that to what a student-owned asset would be, and that's about 20%. So it does have an impact on it. It's just not what we'd consider to be a large impact on it.
OK. When you say student asset, that might be if my kid had a job, and they got money in the bank. That impacts it by 20%.
Yeah, exactly. Doing all those things we want them to do as they're getting ready to join the...the real world. But yeah, any money that's in their name, that would be qualified as a student asset.
OK. What if a grandparent-- if my mom opens an account for my kids and financial aid looks at that? Or do they look at that? How does that impact it?
Yeah. So currently, right now the way it's set up, is grandparent-owned 529s do not count towards federal aid. So what that would mean is that any money for that beneficiary in a 529 account opened by that grandparent would not have impact.
I do just want to say that's how it's set up for right now. That doesn't mean that's how it's always going to be. And you always want to make sure that whenever you're opening up an account or looking at what you want your financial picture to be, make sure you're doing it thoughtfully. And if you want to talk to a tax professional or a financial professional, that's always going to help put you in the best position to make the right decisions for you and your own situation.
You mentioned earlier this is an investment account. As I'm opening, how do I make sure I'm choosing the right 529 account for me?
Yeah. So one of the first things that I talk about with people is you should take a look at the plan that your state offers. So every state offers a plan. And each of those plans can have different characteristics, such as a state tax deduction or a state tax credit.
So you always want to make sure you're looking at the plan that your state offers to see if some of those benefits would help you out. But you're not required to do that. So there are no residency requirements. So just because you live in one state doesn't mean you have to invest in that plan. You can invest in any other state's plan.
And other things that you want to think about are the investment lineup, the fees, the products that they offer, the services that they offer. So, again, there's a lot of factors that would come into play that you'd want to look at. Again, you would want to start with that state-specific standpoint to see if you would get any additional benefits from that.
So I've picked my plan. But now, as we talk about investment options, what's available to me?
So each state has their own investment lineup that they choose. And most commonly, what you're going to see is we call it an aged-based portfolio. So it means that it's going to be a little bit more aggressive when you have a longer investment horizon. And then it will become more conservative as you get closer to needing to utilize it. So it kind of does all the work for you. That's typically the most common investment you'll see in a 529.
There are other options, though. If you're someone who's more from a target risk standpoint, so you're thinking about more of conservative or aggressive in that standpoint, there are portfolios that way. And there's also ones that we have, such as like a money market or a stable value portfolio. You can invest in that. So there are a lot of options, and it's really set up for the individual investor to choose.
And for a lot of people, this is the first time they've ever had an investment account, and that can be overwhelming. Don't let that be a barrier to entry to opening it up. There's a ton of resources for you to help understand it. But you do have to be invested in these accounts.
Do you see that? Do you see that as a barrier for some folks? How?
I think the most common thing that we see when people are opening up accounts is they tend to stop when it comes to that investment piece. And I think it's just kind of nervousness. As I mentioned earlier, it's the first time they're investing.
There are a ton of resources out there available to folks to help them understand what that's going to look like. So you want to take advantage of that because since it does have to be invested, you don't really have the option. But just understanding it and learning a little bit more about it, it not only helps educate you when you're looking at these accounts, but also gives you a broader financial picture so that if you do want to continue investing, it's kind of a nice first step into the investing world.
So let's take a look at the savings and how they can build up over time. Give me some numbers and show me.
Yeah. So what's helpful to do is you want to think about investments is that it's not about timing the market. It's about the amount of time you can have in the market. And I think a lot of times people are thinking this has to be a massive amount.
You can do something like $50 a month. If you assume a rate of return of around 4.5% in this hypothetical example, after 15 years, you could have around $12,800 in the account. So even when you're starting with that kind of smaller amount, it really does add up over time.
I look at Taylor and Samir and a lot of other families, and they're in it, man. They got the boys running around.
They sure are.
I was not there. I was literally trying to survive parenthood when I first had kids. So like, if I don't open a 529 account when they're babies or toddlers, is it still worth it for me?
Yeah. It's never too late to open up an account. We hear that a lot. It's like, I already missed the boat. Oh, I didn't open up when they were a baby. So what's the point in me doing it right now?
I think what the key is that anything that you're saving in this account now is less that you're going to have to pay later. You might not get that compounded growth that you got from opening up earlier. But there are still those tax advantages that come with a 529 account because you will still get the tax-deferred growth in the account and the tax-free withdrawals, as long as it's utilized for that qualified expense.
What about gifting to a 529? Give me the lowdown here.
Yeah. You're speaking to my heart right here. I think gifting is one of the best things that you can do. So you are able to gift to 529 accounts. I have three boys, so my favorite gift that they get every year is a gift to their education.
It might not be for the younger ones right now. But as they get closer to that college age, I think they'll appreciate it as much as I do. The gift of a college education is about as good as you can give.
We packed so much information into this conversation, but I want to go through some kind of key takeaways. What do you hope people leave with?
Yeah. So I know it can feel overwhelming. College is expensive. It's one of the largest expenses that people have. But just think about anything that you're saving now is less that you're going to have to pay later. So just getting started in doing that is important.
Another thing is you want to try to get invested as early as you can. The longer time you have in the market, the better. But also, mentioned earlier, just because you haven't started, don't let that prevent you from doing it. We mentioned earlier, there's tax advantages to having it. And that's a great way to save for those qualified education expenses.
And 529s are not just for college anymore. So you can use it for things such as trade schools, apprenticeship programs, things like that. Or even if you don't use it for any of that, we mentioned there's the ability to change the beneficiary for it, or even look at that Roth transfer that we talked about earlier.
And the last thing that I would tell people, and I'm sure that this has been said on this podcast many times, have a plan. So those that have a plan have a much higher likelihood of meeting the goal that they have set up. And I'll also throw in talking to your kids about it, helping them understand what the paying for school journey is going to look like.
If you talk to your child about it, you have an even higher likelihood of meeting those goals. So have that family conversation. It puts yourself in a much better position.
Family conversations have a plan. Cory Latham, thank you so much.
Thank you.
We have more 529 resources and Fidelity's college savings calculator to see if you're on track to meet your savings goals. It's all on our website Fidelity.com/MoneyUnscripted. And we
want to know what topics you hope we cover here on the podcast. Send us an email at
[email protected]. Maybe it'll be a future episode. We'll see you next time here on Money Unscripted. It's your life. Get your money's worth.
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[Disclosures]
Please carefully consider the plan's investment objectives, risks, charges, and expenses before investing. For this and other information on any 529 college savings plan managed by Fidelity, contact Fidelity for a free Fact Kit, or view one online. Read it carefully before you invest or send money.
The UNIQUE College Investing Plan, U.Fund College Investing Plan, DE529 Education Savings Plan, AZ529, Arizona's Education Savings Plan, and the Connecticut Higher Education Trust (CHET) 529 College Savings Plan - Direct Plan are offered by the state of New Hampshire, MEFA, the state of Delaware, and the state of Arizona with the Arizona State Treasurer's Office as the Plan Administrator and the Arizona State Board of Investment as Plan Trustee, and the Treasurer of the state of Connecticut respectively, and managed by Fidelity Investments.
Units of the portfolios are municipal securities and may be subject to market volatility and fluctuation.
529 distributions for qualified education expenses are generally federal income tax free. 529 assets may be used to pay for (i) qualified higher education expenses, (ii) qualified expenses for registered apprenticeship programs, (iii) up to $10,000 per taxable year per beneficiary for tuition expenses in connection with enrollment at a public, private, or religious elementary or secondary educational institution. Although such assets may come from multiple 529 accounts, the $10,000 qualified withdrawal limit will be aggregated on a per beneficiary basis. The IRS has not provided guidance to date on the methodology of allocating the $10,000 annual maximum among withdrawals from different 529 accounts, and (iv) amounts paid as principal or interest on any qualified education loan of a 529 plan designated beneficiary or a sibling of the designated beneficiary. The amount treated as a qualified expense is subject to a lifetime limit of $10,000 per individual. Although the assets may come from multiple 529 accounts, the $10,000 withdrawal limit for qualified educational loans payments will be aggregated on a per individual basis. The IRS has not provided guidance to date on the methodology of allocating the $10,000 annual maximum among withdrawals from different 529 accounts. Any earnings on distributions not used for qualified higher educational expenses or that exceed distribution limits may be taxed as ordinary income and may be subject to a 10% federal tax penalty tax. Some states do not conform with federal tax law. Please check with your home state to determine if it recognizes the expanded 529 benefits afforded under federal tax law, including distributions for elementary and secondary education expenses, apprenticeship programs, and student loan repayments.
You may want to consult with a tax professional before investing or making distributions.
Beginning January 2024, the Secure 2.0 Act of 2022 (the "Act") provides that you may transfer assets from your 529 account to a Roth IRA established for the Designated Beneficiary of a 529 account under the following conditions: (i) the 529 account must be maintained for the Designated Beneficiary for at least 15 years, (ii) the transfer amount must come from contributions made to the 529 account at least five years prior to the 529-to-Roth IRA transfer date, (iii) the Roth IRA must be established in the name of the Designated Beneficiary of the 529 account, (iv) the amount transferred to a Roth IRA is limited to the annual Roth IRA contribution limit, and (v) the aggregate amount transferred from a 529 account to a Roth IRA may not exceed $35,000 per individual. It is your responsibility to maintain adequate records and documentation on your accounts to ensure you comply with the 529-to-Roth IRA transfer requirements set forth in the Internal Revenue Code. The Internal Revenue Service ("IRS") has not issued guidance on the 529-to-Roth IRA transfer provision in the Act but is anticipated to do so in the future. Based on forthcoming guidance, it may be necessary to change or modify some 529-to-Roth IRA transfer requirements. Please consult a financial or tax professional regarding your specific circumstances before making any investment decision. This hypothetical example illustrates the potential value of different regular monthly investments for different periods of time and assumes an average annual return of 4.5% rounded to the nearest $50. Contributions to a 529 plan account must be made with after-tax dollars. This does not reflect an actual investment and does not reflect any taxes, fees, expenses, or inflation. If it did, results would be lower. Returns will vary, and different investments may perform better or worse than this example. Periodic investment plans do not ensure a profit and do not protect against loss in a declining market. Past performance is no guarantee of future results.
Investing involves risk, including risk of loss. Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. The views and opinions expressed by the Fidelity speaker are his or her own as of the date of the recording and do not necessarily represent the views of Fidelity Investments or its affiliates. Any such views are subject to change at any time based on market or other conditions, and Fidelity disclaims any responsibility to update such views. These views should not be relied on as investment advice and, because investment decisions are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity product. Neither Fidelity nor the Fidelity speaker can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial advisor for additional information concerning your specific situation.
This podcast is intended for U.S. persons only and is not a solicitation for any Fidelity product or service.
This podcast is provided for your personal noncommercial use and is the copyrighted work of FMR LLC. You may not reproduce this podcast, in whole or in part, in any form without the permission of FMR LLC.
Samir Jalloul is not employed by Fidelity and did not receive compensation for his services.
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