Why 529 Plans Are a Popular Choice for Education Savings

A 529 savings plan continues to be popular among families with children who may someday pursue higher education.¹ The number of accounts and amount of assets within those accounts has grown over time – with 16.25 million accounts nationwide and total assets equaling $450.5 billion as of June 2023. The average account size climbed to $27,741 in 2023 from $13,188 in 2009.²

Here are some key facts for families to consider about 529 plans.

This article is sponsored by New Jersey’s NJBEST 529 College Savings Plan.

5 Top Five Benefits to a 529 Savings Plan

• Tax advantages

You pay no federal income taxes on account earnings while the account is invested. And you will pay no federal income taxes when the money is withdrawn to pay for qualified education expenses. New Jersey taxpayers with a gross income of $200,000 or less may qualify for a state income tax deduction for contributions to an NJBEST plan of up to $10,000 per year.³

• Control of account

You control the account, even when the child (beneficiary) reaches legal age. As the account owner, you retain control over withdrawals for the life of the account. In most cases, contributions to the account can be removed from your estate for tax purposes, yet you can retain control over the assets.

• No income or time limits on contributions

Unlike certain accounts, such as Roth IRAs, a 529 is open to anyone regardless of income. There is also no age or time limit on contributions, as is the case with certain custodial accounts.

• Potential incentives for residents who invest in their state’s plan

New Jersey residents may be eligible for a one-time, dollar-for-dollar match of up to $750 of the initial deposit into a new NJBEST 529 College Savings Plan account for a new beneficiary.⁴ Students at New Jersey colleges or universities may also be eligible to receive a tax-free college scholarship of up to $6,000, depending on how long the plan has been open and how much was deposited into the account.⁵

• Age or enrollment-date investment options

Savers have a wide range of investment options such as age-based strategies that are actively managed and become more conservative as a child approaches college enrollment age.

2 Biggest Myths

Myth 1: I won’t be eligible for financial aid if I own a 529 plan.

The truth: 529 plans are treated favorably when a student applies for financial aid and their Student Aid Index is calculated. 

As an asset, 529 plan funds count as a small percentage of the parent(s)’ assets versus other types of savings accounts, such as a custodial account for a minor. 

When paying for college, 529 plan distributions from a parent-owned account are not factored as part of the income calculation for the Free Application for Federal Student Aid (FAFSA). Effective for the 2024–2025 school year, grandparent-owned 529 accounts will no longer impact a student’s eligibility to receive need-based financial aid either.

Myth 2: I may have to pay a penalty and taxes if there are funds leftover not needed for qualified education expenses.

The truth: Some families find they have saved more than their children need for college. Students may graduate early or attend a less expensive program. 529 plans offer several options if you don’t use all the money in the account.

• Transfer the money to another 529 account (money can be transferred to a sibling or family member in same generation as the original beneficiary).
• Change ownership to yourself to use for education at any accredited school.
• Take a non-qualified distribution in the name of the child so the tax rate is lower.
• Effective in 2024, transfer up to $35,000 to a Roth IRA.⁶

9 Qualified Expenses You Can Use a 529 to Pay

• Eligible college costs
• Tuition and fees
• Room and board
• Wi-Fi
• Computers
• Books
• Certified apprenticeship programs
• K–12 tuition – Up to $10,000 per student, per year may be used to pay for tuition at any public, private, or religious elementary or secondary school
• Student loan repayment – A lifetime amount of $10,000 may be used to pay back student loans

Learn more about New Jersey’s NJBEST 529 College Savings Plan. 

_{1. The Federal Tax Cuts and Jobs Act (TCJA), which was signed into law in December 2017 and became effective January 1, 2018, expanded the definition of a qualified higher education expense to include up to $10,000 (federal tax-free withdrawals) per year in tuition expenses at private, public and religious elementary and secondary schools (K-12). The state tax consequences of using 529 plans for elementary or secondary education tuition expenses will vary depending on state law and may include recapture of tax deductions received from the original state and may also include taxes and penalties. Some states do not offer state tax deductions or tax credits for K-12 tuition, and other restrictions may apply.}

_{2. Source: College Savings Plan Network, as of June 2023.}

_{3. The New Jersey College Affordability Act allows for a state tax deduction for contributions to a Franklin Templeton 529 College Savings Plan of up to $10,000 per year, for those with a gross income of $200,000 or less, beginning with contributions made in tax year 2022. The maximum deduction is $10,000. Because each investor’s circumstances are different, please consult your tax professional for more information about considerations that may be relevant to your particular situation.}

_{4. As a result of the New Jersey College Affordability Act, New Jersey taxpayers with a household adjusted gross income between $0 and $75,000 may be eligible for a one-time dollar-for-dollar match of up to $750 of the initial deposit into an NJBEST account for accounts open on or after June 29, 2021. Visit HESAA's website (https://www.hesaa.org/Pages/NJBESTMatchingProgram.aspx) for terms and conditions and how to apply. This program is subject to available funding.}

_{5. Investing in NJBEST does not guarantee admission to, or sufficient funds for, any particular elementary, secondary, or postsecondary school. The scholarship is only available for college and is awarded for any fall or spring semester of college. The scholarship may be awarded only once to an eligible beneficiary. The NJBEST Scholarship is provided by the New Jersey Higher Education Student Assistance Authority (HESAA).}

_{6. SECURE Act 2.0. Transfers are subject to Roth IRA contribution limits, and the account must have been open for more than 15 years. This provision is effective for distributions after December 31, 2023. Other conditions apply. For more information please visit: https://www.finance.senate.gov/}

_{All investments involve risk including possible loss of principal. Diversification does not guarantee a profit or protect against a loss.}

_{Investors should carefully consider plan investment goals, risks, charges and expenses before investing. To obtain the Program Description, which contains this and other information, call Franklin Distributors, LLC, the manager and underwriter for the plan, at (877) 4NJ-BEST. You should read the Program Description carefully before investing and consider whether your or the beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in its qualified tuition program.}

_{NJBEST New Jersey's 529 College Savings Plan is offered and administered by the New Jersey Higher Education Student Assistance Authority (HESAA); managed and distributed by Franklin Distributors, LLC, an affiliate of Franklin Resources, Inc., which operates as Franklin Templeton.}

_{Investments in NJBEST are not insured by the FDIC or any other government agency and are not deposits or other obligations of any depository institution. Investments are not guaranteed by the State of New Jersey, Franklin Distributors, LLC, Franklin Templeton, or its affiliates and are subject to risks, including loss of principal amount invested. Investing in the plan does not guarantee admission to any particular primary, secondary school or college, or sufficient funds for primary, secondary school or college.}

_{Franklin Templeton, its affiliates, and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax professional.}

_{© 2024. Franklin Distributors, LLC. Member FINRA/SIPC.}