Are You Prepared for the Rising Cost of Higher Education?

We’re all juggling multiple financial goals. A 529 plan can help you accomplish several at once. 

While a college education is one of the most meaningful gifts a child can receive, the price tag can be overwhelming. It currently costs, on average, $188,000 for tuition, fees, room and board, for a four-year private college.1 Assuming a college-cost inflation rate of 3%, today’s 8-year-old child can expect to pay $265,000 for college in 2028.2 This could be why paying for a child’s or grandchild’s education is one of the most important long-term goals cited by investors in the Morgan Stanley Investor Pulse Poll.3  

Like saving toward any long-term goal, investing even small amounts each year can add up by the time a young child is ready to go to college. If you’re looking to set aside money for a child or grandchild’s education, a 529 plan offers you benefits and flexibility while helping you invest. The accounts, named after Section 529 of the Internal Revenue Code, are a tax-advantaged savings vehicle that allows you to save, or even pay in advance, education expenses. Earnings in a 529 plan can be tax deferred, and many states also offer state tax deductions or tax credits. 

Beyond saving for college, a 529 plan can help you and your family members achieve other financial goals, including investing in a tax-favorable way and planning for how you will leave money to future generations.

Flexibility and Control of Your Education Funds


Anyone can open or contribute to a 529 plan, and your beneficiary can be anyone you choose—a child, grandchild, niece or nephew, spouse or even yourself. Contribution limits are set by each state, but most top $200,000 a year. You can even use an account to cover your own school expenses. 

As the account owner, you retain control over the assets in any 529 plan, and you can change the beneficiary at any time. You can also withdraw some or all the assets in the account for any reason, although the earnings portion of a nonqualified withdrawal is subject to ordinary income tax plus, in most cases, a 10% federal income tax penalty.

For example, if your child wins a scholarship, you can transfer 529 funds you’ve saved for her to a sibling, niece or nephew. You can even use the money to pursue your own higher degree. 

529 plans have become even more flexible. The Federal Tax Cuts and Jobs Act of 2017 expanded 529 plan benefits to include federal tax free qualified withdrawals from 529 plans of up to $10,000 per year per student to pay expenses for tuition, in connection with enrollment or attendance at an elementary or secondary public, private or religious school.  Note that state tax treatment of K-12 withdrawals is currently under review by many states. Speak with your tax advisor if you’re thinking of using 529 plan funds for grade school expenses.          

Tax Benefits for College Savings


The money you invest in a 529 plan can compound tax free. That means your earnings can be used to grow your funds, rather than be siphoned off to pay taxes. Also, more than 30 states let you take a full or partial deduction or credit for these contributions on your state return. 

When you take out money from your 529 plan account to pay for qualified expenses at virtually any accredited post-secondary school, your withdrawal, including investment earnings, will be federal income tax-free. Qualified expenses include tuition, fees, room and board, books or supplies such as a laptop or software.

Gifting to Family Members and Estate Planning


529 plan contributions are treated as gifts—up to $15,000 per beneficiary; $30,000 for couples filing jointly, so they may lower your tax liability.  You can also make an “accelerated gift” under gift tax rules. That allows you to use up to five years of annual gift tax exclusions in one year, or $75,000 per beneficiary, $150,000 for couples.4

Assets you hold in a 529 plan are not considered part of your taxable estate.

Rewards from the Gift of Education


With education costs continuing to skyrocket, a tax-advantaged 529 plan provides a meaningful gift to children and their parents. Morgan Stanley offers a robust selection of 529 plans from some of the nation’s leading mutual fund companies. Talk with your Morgan Stanley Financial Advisor for more information.

1 College Board, https://www.collegeboard.org/releases/2017/students-families-pay-more-out-of-pocket; $46,950 represents the average annual cost in 2017 of a private four-year institution for tuition, fees, room and board (~$188,000 across four years).
2 College Board, College Savings Calculator, https://bigfuture.collegeboard.org/pay-for-college/paying-your-share/college-savings-calculator; rounded from $263,974.
3 The Morgan Stanley Investor Pulse Poll surveyed more than 1,200 investors age 25 to 75 with over $100,000 in assets. 
4 This assumes that there are no gifts made by the gift giver to the beneficiary in the prior five years. Any gifts made in the five years prior to or the four years after an accelerated gift is made may result in a taxable event.

An investor should consider the investment objectives, risks, charges, expenses and potential tax consequences associated with 529 plans and municipal fund securities before investing. More information about municipal fund securities is available in the issuer's official statement–the 529 Plan Program Disclosure–which is available from your Financial Advisor. It should be read carefully before investing.

Investments are subject to market risk and may fluctuate in value. Before investing, investors should consider whether tax or other benefits are only available for investments in the investor’s home-state 529 college savings plan. Assets can accumulate and be withdrawn federally tax-free only if they are used to pay for qualified expenses. Earnings on nonqualified distributions will be subject to income tax and a 10% federal income tax penalty. Some states offer favorable tax treatment and other benefits to their residents only if they invest in the state’s own Qualified Tuition Program. Investors should consult with their financial and tax advisor before investing in any 529 plan, or contact their state tax division for more information. Some plans may have age, residency or other restrictions and may charge a fee for beneficiary changes.

Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors do not provide tax or legal advice. Clients should consult their personal tax advisor for tax-related matters and their attorney for legal matters.

© 2018 Morgan Stanley Smith Barney LLC. Member SIPC. All rights reserved.

CRC 2122249 5/18