College savings plans offer freebies to encourage families to invest

A promotion for a carnival, or a used car blowout sale? Nope. It’s the sponsors of 529 college savings plans running contests in hopes of driving up participation.

May 29 is the annual “529” National College Savings Day, when the state-sponsored, tax-advantaged savings plans hold a variety of events to stir up interest. North Carolina’s plan, NC 529, will hold a drawing for a deposit of $1,529 into a winner’s account. Nebraska’s Nest 529 plan is offering $100 bonuses for new accounts opened by the end of the month. And Georgia’s Path2College plan will donate gifts of $1,529 to two babies born on May 29.

Other offers are more modest. The California ScholarShare 529 plan is offering a $50 match for all deposits into new accounts from May 29 to June 1. And Tennessee is giving $25 matching gifts for new accounts this month, while also offering the chance to win four tickets to attractions like the Tennessee Aquarium.

The College Savings Plans Network, an industry group, offers an online map with links that detail offers in each state.

All states but Wyoming now offer some type of 529 plan, as does the District of Columbia. The plans allow families to invest in an account that grows tax-free. The money is also withdrawn tax free, as long as it is spent on eligible expenses like tuition, fees and other costs, including room and board, books and equipment. (A few plans, known as prepaid tuition plans, work a bit differently.) For additional details, a good resource is www.savingforcollege.com.

Rules for 529 plans were established by Congress in 1996, and the plans began growing more quickly after 2001, when withdrawals were made tax-free. Balances in the accounts have reached record levels, according to the latest data from the savings plans network. The number of accounts grew 3 percent in 2017, while total assets in the plans rose to $319 billion in 2017, a 16 percent increase over the prior year. The average account is now worth $24,000.

Yet the public’s awareness of the plans remains somewhat muted — hence, the annual spring publicity campaign.

A survey by the investment firm Edward Jones found that fewer than a third of Americans could correctly identify a 529 plan as an education savings tool, although more affluent people were more likely to get it right. The survey of 1,004 adults was done by landline and cellphone in April and has a margin of sampling error of plus or minus 3 percent. (Edward Jones offers “adviser sold” 529 plans, which include professional advice as well as extra sales fees or commissions. Most states offer plans that consumers can enroll in directly, without paying fees.)

James J. Burns, a financial planner on Long Island and an ambassador for the Certified Financial Planner Board of Standards, says some families have misconceptions about 529 plans. For instance, he said, they may worry about what will happen to their savings if their child doesn’t go to college. But the plans are flexible, he said. If a child chooses not to go to college, the money can also be used for vocational schools. Or, the money can be used for another child or relative. (If 529 funds are withdrawn for ineligible purposes, the earnings — but not the original contributions — are generally taxed as income, plus a 10 percent penalty.)

Jim DiUlio, chairman of the College Savings Plans Network, said he expected that younger adults — many of whom had part of their college tuition funded with a 529 plan set up by their parents — will in turn open 529 accounts for their own offspring.

Starting this year, up to $10,000 a year from a 529 fund can be used to pay for private school from elementary school onward.

While the option may make sense for affluent families, DiUlio advised caution. “If you take out money to pay for seventh grade,” he said, “please have a plan for replacing it when college comes around.”

DiUlio also said that some states hadn’t changed their rules to match the federal rules, so they may not offer state tax benefits for using 529 funds for elementary or high school. So it’s best to check with your plan before withdrawing funds for pre-college education.

Here are some questions and answers about 529 savings plans:

Q: Is a minimum deposit amount necessary to set up a 529 plan?

A: Requirements vary by plan, but most have no or very low minimum requirements — $25 to $50, in some cases — for both initial and subsequent deposits.

Q: Are contributions to 529 plans tax deductible?

A: There is no federal tax deduction for 529 deposits, but a majority of states offer a deduction or credit on state tax returns. You don’t have to participate in your own state’s 529 plan, but you may want to if you would like to get the state tax benefit. A half-dozen states — Arizona, Kansas, Maine, Missouri, Montana and Pennsylvania — allow income tax deductions for contributions to other states’ plans. The IRS website has more details.

Q: Do any employers offer 529 contributions as a perk for workers?

A: Eleven percent of employers offer payroll deductions for contributions to 529 savings plans, but just 2 percent offer an employer contribution or match, according to the Society of Human Resource Management’s 2017 employer survey.

This article originally appeared in The New York Times.

College savings plans offer freebies to encourage families to invest

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