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The Raffer Investment Group

The Smart Way to Save for College: The 529 Plan

The 529 Plan: The Smart Way to Save for College

by Jeremy Raffer


Congratulations! If you're reading this it means you have an interest in setting up an education strategy for your children or grandchildren. Over the last decade college costs have risen an average of 5% annually--with no decrease in sight. So let’s explore what you can do to help your kids create a college savings plan and graduate with as little debt as possible.

529 college savings plan



Table of Contents:

What is a 529 Plan?

Which 529 plan is right for me?

How Contributions Work

How Much Should I Contribute?

What Can I Use The Funds For?

How Should I Invest The Funds?



Leftover Funds



What is a 529 Plan?

A 529 is an investment account specifically designed for college savings. Here’s how it works: when you open the account you become the owner and designate a child as the beneficiary of the funds. A 529 plan offers specific tax and financial benefits, but can only be used for specific expenses.


Which 529 Plan Is Right For Me?

Over 30 states offer a tax benefit for contributions to a 529 plan. I recommend using this link to see which plans your state offers and what tax benefits or incentives are available for residents. If you've researched your state and there's a tax benefit to be had, it’s certainly worth considering. However, if there’s no tax benefit in your state or if it's negligible, you may want to reevaluate your options. Two things that you'll certainly  want to consider are fees and investment options. 


How 529 Contributions Work

A 529 account allows for multiple individuals to invest in an account together. Families can choose to contribute to the account for birthdays and holidays instead of buying more toys or frivolous gifts. The maximum someone can donate in a given year without having to worry about taxes is $15,000--per person. So both Mom and Dad can contribute $30,000 in 2019, and if you’d like to drop a lump sum in there, you can contribute 5 years worth at once. There are maximums for total contributions that most people never have to worry about. You can see yours here, but in most cases its around $400,000.


How Much Should I Contribute?

It’s no secret that college is expensive.  According to the national annual average for a state school is $25,290 and $50,900 for a private school. It’s hard not to digress into a conversation about how the rising cost of college is a huge issue we face. We already have over $1,500,000,000,000 in college debt! And no, there are no extra zeros in there. I counted. At current growth rates, if you had a child today, by the time they were 18 and ready for school it would cost $60,165 per year at state school and $120,330 per year at private university.

Simple math says that if you earn 8% on your investments, you’d need to contribute roughly $6,426 per year for state school and $12,852 a year for private school. This doesn’t consider a slew of things like scholarships, financial aid, and graduate school all of which can have a considerable impact on school costs for better or worse. Still, if you contributed $250 per month you’d likely save up enough to pay for half of a state school. Double it for private.*

Also, if you can afford it, there could be a benefit in putting away a lump sum** in the beginning. You get the same value at the end contributing 50k on day one versus putting in $415/month for 18 years (a total of $89,640). That's better   value for your money.


What Can I Use 529 Funds For?

A Qualified Expense is a cost the IRS says you can use your 529 funds for. Here’s a brief cheat sheet of what’s covered and not:




Room & Board

On Campus: Covered

Off Campus (not provided by the school):

Covers the expense of what the school would have provided, if eligible

Meal Plan



The required reading list is covered


If needed for school it’s covered (i.e. laptops yes, smartphones no)


Does not qualify

Insurance payments, health club fees, travel costs, student loans



How Should I Invest the Funds?

Let’s remember College is expensive, and it’s an expense that will probably keep growing. So when it comes to investing, let's keep that in mind. Typically, we have 18 years before we need it. If the market tanks tomorrow, if we hate the president, or if we have a trade war with China, we have 18 years to recover from market volatility and should invest accordingly--which means aggressively as it fits in with one's risk tolerance and investment objectives. As we get closer to when we need the funds then we can usually start to dial back the risk and focus more on preservation.


Taxes and 529 Collegs Savings Plans

Taxes are the largest benefit you’ll enjoy by investing in a 529 plan. Any money you invest in one appreciates without tax. That money can then be used for qualified expenses tax-free. It’s hard to understate how important a benefit this is.

Let’s consider two different account types. In Scenario one, we put $50,000 into a normal account and invest it; over the next 18 years it grows to $200,000. Now let’s say we need access to all the money to pay for school. We have $150,000 in growth taxed at 15% because that’s the long-term capital gains tax rate; this results in $22,500 of taxes for Uncle Sam.


529 College Savings Plan


Let’s consider a 529 college plan now. The same $50,000 growing to the same $200,000 can be used in its entirety without any tax whatsoever*. Every single penny goes straight to the education, like intended. As we get closer to needing the money and want to make the investment more conservative, we don’t have to worry about the tax ramifications for any last-minute changes we make. Finally, several states offer tax deductions for contributions made into a 529. You can see if yours is one here.



Beneficiaries are an important thing to be aware of when it comes to a 529. When you open up a 529 account you must elect an owner and a beneficiary. The investment selection is directed by the owner and the assets are used for the benefit of the beneficiary. The important thing to be aware of here is that you can only have one beneficiary. So, if you’re going to have multiple children in school simultaneously you won’t be able to use the funds from one 529 account for both kids. However, you can change the beneficiaries on a 529, so if you have one child who finishes school and there are extra funds left in the account, you can change the beneficiary to your other child to use the rest. Also, you can change the beneficiary to any family member including yourself, your spouse, stepchildren, nieces, uncles, and first cousins. A 529 plan can help pay for educational expenses for a variety of family members.


Leftover Funds

What happens if there’s money left over and no one to use it? This can happen for a variety of reasons. Maybe the child doesn’t go to school, or they get a great scholarship and don’t need the money, or perhaps they go to a trade school for two years and only use up half. This is where a 529 can be a little painful. In exchange for the benefit of tax exemption, the government says that any money used for a non-qualified expense is subject to both income tax on the gains as well as a 10% penalty. So, you can easily lose 1/3 to the government in the process of trying to liquidate the account.



529 plans can be an effective way to save for college. As long as you are aware of how contributions work, what the funds can be used for, and what that means for beneficiaries, you can use the plan as a powerful tool to pay for college--perhaps for more than just the original beneficiary!

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Jeremy Raffer, MBA
Wealth Manager
Phone – 201-773-4641



Any opinions are those of Jeremy Raffer and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and  are subject to change without notice.  The information has been obtained from sources considered to be reliable, but we do not guarantee that  the foregoing material is accurate or complete. Any information is not a complete summary or  statement of all available data necessary for making an investment decision and does not constitute  a recommendation. Investments mentioned may not be suitable for all investors. Prior to making an  investment decision, please consult with your financial advisor about your individual situation.


*This is a hypothetical example for illustrative purposes only. It is not intended to reflect the actual performance of any security. Investments involve risk and you may incur a profit or a loss.


Rules and laws governing 529 plans are varied and subject to  change. As with other investments, there are generally fees and expenses associated with  participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. **The tax 
implications can vary significantly from state to state. Certain changes in beneficiary may result in a taxable event. Tax-free withdrawals may be made for qualified education expenses. Otherwise, the deferred earnings portion may be subject to taxes and a 10% penalty. Please consult a qualified tax professional to discuss tax matters. Death of the contributor prior to the end of the five-year 
period may result in a portion of the contribution to be included in the contributor’s estate. Raymond James financial advisors do not render advice on tax or legal matters. As federal and state tax rules are subject to frequent changes,  you should discuss any tax or legal matters with the appropriate professional.



Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 college savings plans before investing. More information about 529 college savings plans is available in the issuer’s official statement, and should be read carefully before investing.