What is a 529 College Savings Plan and How Much Should You Save in Your 529 Plan?

What is a 529 College Savings Plan?

A 529 is an educational savings plan operated by a state to help families save money for college expenses.

My ultimate goal is to provide a reasonable sum of money for my children when they go to college because I do not want to burden them with the significant approx. $80,000 amount of student debt I had to pay off.

In this post, I will discuss:

• Current college costs and how much you would need to save to cover these costs
• Eligible expenses the 529 savings plan covers
• The tax advantages for saving into a 529 and other advantages of the 529
• What happens if the beneficiary I designate doesn’t go to college?
• The steps to set up a 529 savings plan

Before I dive into the 529 plan, I found this rather helpful Youtube video where Travis details some of the basics of the 529 college savings plan. It’s a short video, and will definitely add to the context of what I have provided below.  You should take the few minutes to watch this:

How Much Money Should You Save In Your 529 Plan?

I do not know how much college will cost when my kids go to school.

I looked at a few different websites and at a few colleges here in Minnesota to get an estimate. Currently, the University of Minnesota costs almost $26,000 per year for an in-state resident ($36k for out-of-state). Saint Cloud State is around $17,000 per year ($25,000 for out-of-state residents).

The average cost for public universities across the U.S. is similar, coming in between $20k-$25k for an in-state resident and around $35,000 for an out-of-state resident. Private colleges are significantly more expensive – average cost around $45,000 per year.

For my husband and I, we are planning to start saving with an initial $1,000 investment and saving $100/month. There are many investment calculators out there, but as an engineer, I like to do the calculations myself (using Excel or Google Sheets!).

Below, I used the future value function (FV) to project what we could save over 18 years with the following: an initial $1000 investment, $100 a month contribution, and a 5% and 7% annual rate of return for comparison.

This is a great way to save money. Over the 18 year period, we will have contributed $22,600.

Even with a modest 5% return, we will have almost doubled the amount of money we contributed to the 529. The best thing about the gains is that they are tax-free!

Now I understand this doesn’t cover the entire cost of a four-year college, which would cost around $100,000, however. this is an amount that we are comfortable saving (for now). If we did want to save $100,000, I used the payment function in excel to calculate what the monthly contribution would need to be:

What Expenses Can the Money From a 529 be Used For?

Each state specifies what the money can be used for. Check this website to ensure what the plan for your state covers. The money can be used at any accredited university, college, or vocational school.  Per the Minnesota Disclosure booklet:

“Qualified Higher Education Expenses are defined generally to include tuition, certain room and board expenses, fees, the cost of computers, hardware, certain software, and internet access and related services, and the cost of books, supplies and equipment required for the enrollment or attendance of a Beneficiary at an Eligible Educational Institution. On page 18 of the Disclosure Booklet, under the subheading “Qualified Withdrawals,” the following sentence is added to the end of the second paragraph: To be treated as Qualified Higher Education Expenses, computers, hardware, software, and internet access and related services must be used primarily by the Beneficiary while enrolled at an Eligible Educational Institution. Qualified Higher Education Expenses do not include expenses for computer software designed for sports, games or hobbies unless the software is predominantly educational in nature.”

What Are the Tax Advantages of a 529 College Savings Plan?

When considering the tax benefits of the 529 plan, you need to look at the federal and state tax implications. Each state’s tax benefits are different. Here is a good website that enables you to compare different state’s plans and their benefits. You can, for almost any state, set up your 529 in a different state. For example, Utah’s plan has performed the best over the last 10 year period. Additionally, I will discuss estate planning tax benefits.

Federal and State Tax Benefits of a 529 College Savings Plan?

The Federal and State tax benefits are similar. The money that is invested in a 529 plan is NOT deductible on taxes. However, any gains made over the course of the investment are not taxed. Finally, there are no taxes paid on the money you withdrawal as long as the money is used for college expenses.

Estate Tax Planning Benefits

There are ways to utilize the gift tax to further enhance the 529 savings plan. A single filer can contribute $14,000 per year and married filers can contribute $28,000 per year -there is no federal gift tax on these contributions if they are under these amounts [1].

Other Advantages of a 529 Savings Plan:

** Includes some information on the 529 Savings Plan Minnesota

• Favorable financial aid treatment: only a maximum of 5.64% of the value of parental assets are counted toward a student’s Expected Family Contribution, compared to 20% of the value of the student’s asset [2].
• The 529 savings plan has low fees [2]. Below is the current fees for the Minnesota plan:
  529 savings plan Minnesota.
• There are many investment options, including age-based portfolios that automatically adjust the level of risk (e.g. lower risk as the beneficiary gets older).
• Anyone can contribute to the account: grandparents, other family members, and friends.

What if my beneficiary doesn’t want to go to college?

Once you open an account, you can change the beneficiary. Eligible people include family members of the original beneficiary: immediate family, grandparents, stepchildren, in-laws, first cousins, etc.

Three simple steps to set up a 529 savings plan:

Here are the steps I followed to set up a 529 savings plan in Minnesota – it is quite simple. In addition, I looked at the process to open an account in Utah and New York and the process is similar (and simple too!). If you need help determining how to set one up in your set, please contact me or leave a comment:

1. For Minnesota College Savings Plan, download the application here
2. Designate a beneficiary
3. Select your investment options

An excellent book I read is The 501k Plan Book:

The 501K Plan Book Review  

This book, the 501k Plan Book is written by Tom and Mark Ford Dyson

It’s an excellent resource if you’re looking for additional and more in-depth information on the 501k Plan. The book dives into financial research, provides a guide and steps, along with tutorials for all stages of retirement savings.  You can think of this as having a life insurance policy that can be used as your own bank account, and could, very well one day replace social security.

Good luck with your wealth-creating journey.

If you enjoyed this post, you might also enjoy this one: How Much Money Do You Need To Never Have To Work Again? Let’s Do The Math.

And this one:  Roth Conversion Ladder and SEPP: How to Access Your Retirement Accounts in Early Retirement

And this one: How Do You Know When It’s Time to Sell Your Business? It’s Not All About the Money.

You should also consider subscribing to my blog. I publish one article a week on small business and wealth creation.  You can subscribe here.

Also, I published a book during the summer of 2018, “The Kickass Entrepreneur’s Guide to Investing, Three Simple Steps to Create Massive Wealth with Your Business’s Profits.” It was number 1 on Amazon in both the business and non-fiction sections. You can get a free copy here.