As 529 college savings plans reach their 15-year milestone, they posted record total assets of $213.5 billion in the third quarter of 2013, which highlights the popularity of the savings tool for families coping with the escalating costs of higher education.
"We have a significant number of participants across all income levels," said Mary Morris, chairman of the College Savings Foundation and CEO of Virginia 529 in Richmond, Va. "We have a higher percentage of families in higher-income brackets, but the sweet spot for 529 plans are middle income, middle America, and that's a very broad range of income level."
The 529 plans are tax-advantaged saving plans operated by states or educational institutions that make it easier to put away money for college. The earnings are not taxed by the federal government and usually not taxed by state governments as long as the money is used for educational expenses -- tuition, books, and room and board -- for the designated beneficiary.
There are no tax consequences for changing the designated beneficiary, which can be a relative or friend.
Pennsylvania's 529 college savings program includes two different plans:
• The guaranteed savings plan lets families save for future college expenses at today's rates. Under this plan, families who save enough for a semester at any state college in Pennsylvania will have enough for a semester at that college in the future no matter how much tuition goes up. If the beneficiary decides not to attend a Pennsylvania school, the money can be used at other colleges in the nation.
• Families who choose the Pennsylvania 529 Investment Plan select from a list of 13 investment options from Vanguard. The return is based on the performance of the fund.
Pennsylvania also is one of only six states that have parity. Residents here can contribute to 529 plans in any other state and still receive up to a $14,000 state tax deduction for each child. Someone with 10 children could potentially receive a $140,000 annual tax deduction.
If a beneficiary decides not to attend college, parents can close the account but would have to pay a 10 percent penalty and taxes on the earnings portion of the account.
"It's a generous benefit," Ms. Morris said. "Only six states offer parity. The majority of states that offer a tax benefit only offer it to participants in that state's plan."
According to a report prepared by the College Savings Foundation, there have been an estimated 3.4 million 529 savings plan accounts with distributions since the inception of the program 15 years ago. Total gross distributions have been an estimated $63.6 billion since inception.
"These are families that are working, saving and planning for the future," Ms. Morris said. "With 529 plans, a small amount goes a long way. The important thing is getting started and staying focused on it."
She said studies of low-income families show that a student with any savings earmarked toward college is six times more likely to attend college. "Even a little bit of savings toward college shows commitment by the family, which increases focus and commitment from the kid."
First Published January 28, 2014 9:39 PM