Of all the things that keep parents awake at night, looming college costs may be among the most daunting. For the 2023-2024 school year, the costs for a four-year private college averaged $55,470 per year for tuition, fees, room and board, books and supplies, transportation, and other expenses.1 That amounts to more than $200,000 to cover a four-year degree. And that’s for just one child.
With costs so high, many students and parents are taking on significant student loan debt to pay for college. More than half of those who graduated college in 2022 did so with loans, with an average debt burden of $29,400.2
If you’re on track with your retirement savings, starting the process of saving for the education costs of a child or grandchild early can help limit how much your future student will have to borrow. Consider putting those funds into a 529 education plan, a tax-advantaged way to invest now toward future education expenses.
What is a 529 Plan and Why Consider One?
Named after Section 529 of the Internal Revenue Code, a 529 Plan is a tax-advantaged vehicle you can use to invest for future education expenses. A 529 Plan creates an incentive for families to invest toward education costs because earnings in the plan are tax-deferred, with withdrawals being exempt from federal and, in most cases, state income taxes if you use the funds for qualified expenses, such as tuition, fees, room and board, and supplies. Many states provide additional benefits, such as state tax deductions or tax credits. Additionally, assets in a 529 Plan remain outside of the account owner’s estate for estate-tax purposes.
A 529 Plan can also offer flexibility. Some investments used for education funding require you to give the assets to the beneficiary when they reach a certain age. If you open a 529 Plan, as the owner of the account, you continue to make all of the decisions and retain control over the assets. For example, if your daughter earns a scholarship and won’t fully drawdown the money in the account, you can choose a different beneficiary within the same family, or even use the funds for your own education needs.
You may also be able to use proceeds to pay down student loans or to contribute up to $35,000 in unused funds into a Roth IRA account for the designated beneficiary. In addition to college costs, up to $10,000 per beneficiary per year can be withdrawn federally tax-free to pay for eligible K-12 tuition State tax treatment varies.3
Igniting a Movement to Save for Education
Still, many are unaware of 529 Plans and their expanding benefits. Fewer than a third of parents are currently using a 529 Plan to save for their children’s education. Many people want to save and invest for college, but don’t know where to start, says Jennifer Tierney, Executive Director, Morgan Stanley Wealth Management Investment Solutions and Co-Head of Product Development for Traditional Investment Products.
“Many of our clients are grandparents looking to put themselves in a position to allow them to help with their grandchildren’s future education expenses,” Tierney says. “We encourage them to take a look at 529 Plans, which may not have been on their radar the last time they were looking at how to pay for college.”
529 Contribution Limits Are Considered Gifts for Tax Purposes
In 2024, annual contributions to each 529 account of up to $18,000, or $36,000 for couples filing jointly, are treated as gifts and qualify for the annual per-beneficiary gift tax exclusion.4 Additionally, 529 Plans employ a special rule: an upfront contribution in one year of up to $90,000 for single filers, or $180,000 for married couples filing jointly—the equivalent of five years' contributions—may be made without any gift tax consequences.5
Investing Early for Future Education Costs
When it comes to investing in a 529 Plan, typically the earlier you can start putting money away, the better to allow for more tax-free compounding.
Still, it’s never too late to start saving and investing for college. Money set aside as late as when a child is 16 will still have several years to grow, assuming you use those funds to pay for the latter years of undergraduate expenses, or even graduate school. Funding can continue while student is in school, and beyond, as well.
Your Financial Advisor can help you choose a 529 Plan and the investment option therein best for you as part of your wealth strategy. They can also offer valuable guidance as it relates to any tax changes and during times of market volatility.
“A Financial Advisor can help you project what your education costs could be, provide guidance on selecting a 529 Plan, recommend an asset allocation and tailor your contribution schedule based on your needs,” says Marc Dextraze, Managing Director, Morgan Stanley Wealth Management Investment Solutions, and Head of Traditional Investment Products.
A 529 Plan is a convenient, flexible and tax-advantaged way to invest for a child's future education expenses. Morgan Stanley offers a robust platform of investment options, including the Morgan Stanley National Advisory 529 Plan, a first-of-its-kind advisory 529 Plan that enables you to benefit from fiduciary oversight of your education funding strategy within the context of your broader portfolio and life goals. If you have questions or need more information about 529 Plans available through Morgan Stanley, contact your Financial Advisor or Private Wealth Advisor today.
Footnotes:
1 College Board “Trends in College Pricing and Student Aid 2023”, accessed November 27, 2023 https://research.collegeboard.org/media/pdf/Trends%20Report%202023%20Updated.pdf
2 IBID
3 College Savings Foundation. “U.S. Parents Seek Career-Oriented, Affordable Higher Education for Themselves and Their Children, College Savings Foundation Survey Finds.” Accessed November 28, 2023 https://www.collegesavingsfoundation.org/press-releases/u-s-parents-seek-career-oriented-and-affordable-higher-education-for-themselves-and-their-children-college-savings-foundation-survey-finds/
4 IRS. “IRS provides tax inflation adjustments for tax year 2024” - https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024
5 The filing of IRS form 709 is required to validate the five-year election.
For more information, please see the applicable Morgan Stanley ADV brochure: www.ms.com/adv.
Investors should consider many factors before deciding which 529 Plan is appropriate. Some of these factors include: the Plan’s investment options and the historical investment performance of these options, the Plan’s flexibility and features, the reputation and expertise of the Plan’s investment manager, Plan contribution limits and the federal and state tax benefits associated with an investment in the Plan. Some states, for example, offer favorable tax treatment and other benefits to their residents only if they invest in the state’s own Qualified Tuition Program. Investors should determine their home state’s tax treatment of 529 Plans when considering whether to choose an in-state or out-of-state plan. Investors should consult with their tax or legal advisor before investing in any 529 Plan or contact their state tax division for more information. Morgan Stanley Smith Barney LLC does not provide tax and/or legal advice. Investors should review a Plan Program Disclosure Statement, which contains more information on investment options, risk factors, fees and expenses, and possible tax consequences.
The North Carolina State Education Assistance Authority (the "Authority") is an instrumentality of the State of North Carolina sponsoring the Morgan Stanley National Advisory 529 Plan, and the Morgan Stanley National Advisory 529 Plan is a component of the Parental Savings Trust Fund established by the General Assembly of North Carolina. Neither the Authority, the State of North Carolina nor any other affiliated public entity or any other public entity is guaranteeing the principal or earnings in any account. Contributions or accounts may lose value and nothing stated herein, the Plan Description and Participation Agreement or any other account documentation shall be construed to create any obligation of the Authority, the North Carolina State Treasurer, the State of North Carolina, or any agency or instrumentality of the State of North Carolina to guarantee for the benefit of any parent, other interested party, or designated beneficiary the rate of return or other return for any contribution to the Parental Savings Trust Fund.
If an account owner or the beneficiary resides in or pays income taxes to a state that offers its own 529 college savings or pre-paid tuition plan (an “In-State Plan”), that state may offer state or local tax benefits. These tax benefits may include deductible contributions, deferral of taxes on earnings and/or tax-free withdrawals. In addition, some states waive or discount fees or offer other benefits for state residents or taxpayers who participate in the In-State Plan. An account owner may be denied any or all state or local tax benefits or expense reductions by investing in another state’s plan (an “Out-of-State Plan”). In addition, an account owner’s state or locality may seek to recover the value of tax benefits (by assessing income or penalty taxes) should an account owner rollover or transfer assets from an In-State Plan to an Out-of-State Plan. While state and local tax consequences and plan expenses are not the only factors to consider when investing in a 529 Plan, they are important to an account owner’s investment return and should be taken into account when selecting a 529 Plan.
Tax laws are complex and are subject to change. This information is based upon current tax rules in effect at the time this was written. Morgan Stanley Smith Barney LLC and its Financial Advisors do not provide tax or legal advice. Individuals should always check with their tax or legal advisor before engaging in any transaction involving 529 Plans, Education Savings Accounts, and other tax-advantaged investments.
Investments in a 529 Plan are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so an individual may lose money.
The 529 Plan Program Disclosure contains more information on investment options, risk factors, fees and expenses, and potential tax consequences. Investors can obtain a 529 Plan Program Disclosure from their Financial Advisor and should read it carefully before investing.
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