Why It Pays to Use a 529

If you are the proud parent or grandparent of a newborn baby, one of your most important goals is probably to help prepare for college expenses. But what is the best way to do this? While you may have considered setting up a custodial account, using a prepaid tuition plan, or hoping for a full-ride scholarship, the best and most reliable way to pay for college is to start saving as soon as you can. The good news is there is a great vehicle to save for college called a 529 account, named after section 529 of the Internal Revenue Code (IRC).

The Good:

The 529 plan offers many tax advantages. The main benefit is that money invested in a 529 grows tax-free and is not taxed when withdrawn from the account, as long as the money is used for qualified educational expenses. (Sorry Junior, no Corvette!) Additionally, depending on your state and specific situation, you might be eligible for a state tax deduction for some contributions made to a 529. Alpha Fiduciary’s financial advisors in Scottsdale can help you navigate your options.

It’s Flexible

You also remain the owner of the account; you stay in control. What if Junior doesn’t want to attend college? Then the beneficiary can be switched to another child or grandchild. You could even use the 529 funds for your own educational goals. There is a great degree of flexibility when it comes to naming and changing the beneficiary on a 529.

High Contribution Limits

There are high contribution limits as well, which can exceed $200,000 over the lifetime of the account. And you get to choose how to invest your contributions, using whichever investment options are available to you in the plan you select.

You Have Options

Finally, you are not tied to using your own state’s 529 plan. Some states offer a superior range of investment options in their plan, and an Alpha Fiduciary financial advisor in Scottsdale can help you determine which plan best fits your needs. In addition, although plans often have an ‘advisor sold’ option, because Alpha Fiduciary does not earn a commission on anything you purchase, our financial advisors will happily assist you with signing up for a “direct sold” plan that is generally cheaper.


The Potentially Not So Good:

Should the funds be taken from the 529 for purposes other than those permitted by section 529 of the IRC, there will be taxes and a 10% penalty on the earnings. But because your contributions come from “after-tax” dollars, they themselves are not subject to these taxes and penalties. Keep in mind that the earnings in the 529 depend on the investments you make. If those investments don’t perform then you might not end up with as much money as you might expected.

You might have been told that having a 529 limits your child access to financial aid. The great news is that, assuming a parent owns the account, only a maximum of 5.64% of the account counts towards financial aid eligibility calculations. This percentage is more favorable than other student assets which are counted at 20%.

The Bottom Line:

When it comes to saving for college, using a 529 is a great way to accumulate money. Although all the choices may appear intimidating at first, the most important thing to do is to take action now. If you need help navigating the 529 world, contact our financial advisers who can be your 529 GPS!


About Arthur Doglione

Arthur is an industry veteran with more than 20 years of experience working with high-net-worth clients. He has an extensive background in wealth management with particular expertise in portfolio management. Before establishing Alpha Fiduciary, Art was a Senior Vice President with Merrill Lynch where he built his practice to be the largest of Merrill Lynch’s Arizona territory.

Art founded Alpha Fiduciary in 2006 and has completed two acquisitions since then. The firm currently serves clients across many states as a fee-only Registered Investment Advisor (RIA).

Art founded Alpha Fiduciary as a fiduciary advisory firm. This means it has a responsibility to its clients first and foremost.