Math nerds celebrate Pi Day (3.14). Personal Finance nerds celebrate National 529 Day (5-29)!
What? You didn’t know that was a thing?
Okay, so neither did I until I was invited to be a blog ambassador for ScholarShare, California’s 529 College Savings Plan. I spent a day in Los Angeles learning all about 529 college savings plans and I’m excited to share what I learned with you over the next few months.
Today we’ll talk about the basics of 529 college savings plans. If you decide to start a plan, you can take advantage of ScholarShare’s $50 bonus program offered for just 24 hours on 5-29 (this Friday).
What is a 529 anyway?
Just like a 401K, a 529 gets its name from its section in the tax code. A 529 is an investment vehicle specifically for college savings. Money from a 529 plan can be used for higher education expenses such as tuition, books, and even eligible housing costs. The funds can be used for a four-year college and graduate or post-graduate work, but also for many community colleges, technical colleges, and professional schools.
The major benefit of putting money into a 529 is that you pay no federal income tax on the earnings when you withdraw the money for qualified higher education expenses. A less calculable benefit, but no less important in my opinion, is that you can decide once to begin saving, and then put the savings on autopilot so that your college saving funds grow without your having to make an affirmative choice to contribute each month.
Most states sponsor a 529 plan. Each plan is different. Do your research and decide on the plan that you want for your family. For most state plans, your state of residence does not matter. You could live in Ohio, have California’s 529 Plan, and go to college in Utah.
What is ScholarShare?
The ScholarShare College Savings Plan is offered by the State of California. California sponsors a 529 program because they have an interest in helping and encouraging families to save for the expenses of higher education. The plan is managered by TIAA-CREF Tuition Financing, Inc.
ScholarShare offers 19 investment portfolios that give account holders many options to choose from. Depending on your risk tolerance and savings goals, you can choose from age-based, multi-fund, single-fund and principle plus interest investment portfolios. Some are actively managed and some are passive.
You don’t have to be a California resident or have a student that plans to attend college in California to have a ScholarShare 529 plan. Any US citizen or resident with a valid Social Security Number or Taxpayer ID can open a new account. The minimum deposit to open an account is just $25.
ScholarShare has no annual account maintenance fees. The annual asset-based fee is low, lower even than our mutual fund asset-based fees. Since the plan is direct sold (as opposed to advisor sold), you don’t have additional fees.
ScholarShare 529 Matching Promotion
On Friday (5-29), in honor of National 529 Day, ScholarShare is having a “You Start It, We Match It” campaign. For May 29th only (from 12:01 am to 11:59 pm Pacific time), ScholarShare will match a $50 opening deposit. In order to qualify to receive the $50 matching deposit, you must:
a) Open a new ScholarShare College Savings Plan with an initial deposit of at least $50 (to be contributed and invested at the time the new account is opened)
b) Enroll in the automatic contribution plan (ACP) for the new account with at least a $25 contribution per month
You can open a new ScholarShare Plan account and get the $50 matching deposit for each new beneficiary. If you have three kids, you can open an account for each of them. Of course that means that you’ll also have to commit to a total of $75 per month in automatic investments.
The matching deposit of $50 will be made to the eligible ScholarShare 529 account on or before 11:59 p.m. PT on Dec. 15, 2015. There is a limit of one matching deposit per new ScholarShare account opened for a new beneficiary.
We already have one ScholarShare 529 College Savings Plan for our oldest (she’s 7), but on National 529 Day, we’ll open accounts for our other three.
How about you?
- Did any of you younger readers use a 529 when you went to college (529 plans started in 1996)?
- Have you started saving for your children’s college education yet?
Note: I have teamed up with ScholarShare to spread the word about the 529 college savings plan. I will be compensated for my efforts. The content and opinions in this post are all my own.
I wish we had started this years ago. Now that we are just 3 and 5 years away from college, the hubby doesn’t think 529’s are the way to go. I love the idea though!
I also see nothing in your monthly budgets that say money is going towards college accounts for your kids.
Yep. We just started in May. You will see it in our upcoming budget report that I’ll post next week.
So wait….a few weeks ago, you said you weren’t saving for your kids’ educations in a comment. Now you say you are? Which is it?
We just started– as in this month! 🙂 We won’t be contributing a lot (like $25/month for each kid), but it’s something. I think that starting is the hardest part. It’s easy to put it off until we’re in a better position, but there’s a lot to be said for just starting.
Nice article! We have done a lot of research about how to save for our kid’s college…its such a daunting task! For us, we decided on an IRA. That way money can be taken out for educational purposes penalty fee (much like a 529b), but if my kids decide not to go to college they can still use the money for retirement, or their first house. It just seemed like a better choice for our family (after all… knowing my kids they will become professional clowns and never go to college :))
That’s great that you’ve already started saving. I wonder if 529s work for clown school! 🙂
I don’t have kids but I’m currently in school (PhD student). I use 529s for the tax loophole. Long story short, by putting money into my state’s 529 and then withdrawing it for educational expenses, I get a tax deduction for my contribution! https://fiby40.wordpress.com/2015/01/22/the-529-tax-loophole-only-for-those-who-pay-for-educational-expenses/
Works out to a $120 savings.
One benefit of 529s that isn’t immediately obvious is that it shields income from FAFSA.
Think of FAFSA and the EFC as a “tax” on income and assets, with a different set of rules and definitions from the IRS. For the rest of this comment when I say taxed I mean assessed by FAFSA
Income is assessed at a high rate (the top tax bracket for parents of the student is..20%? Maybe higher? I forget). But, the top tax bracket for parental assets is 5.64%.
Without a 529:
You earn money. That gets taxed. Then, you save the money in some investment. The investment grows. This investment income is taxed at up to 20%.
Additionally, the new larger investment balance is taxed at up to 5.64%
With a 529:
You earn money. That gets taxed. Then, you save the money in a 529. The underlying investments in the 529 grow. This investment income is never taxed because it is held in a 529.
The new 529 balance is still taxed at up to 5.64%.
The investment balance is taxed the same either way, but the investment income in the 529 is never taxed.
That’s great! A lot of people don’t realize that you can use a 529 for yourself.