What is a 529 college savings account and how do you open one in Wisconsin?
This story was republished on Jan. 4, 2022 to make it free for all readers
Anyone can open a 529 college savings account, but most people do not.
Surveys consistently have shown that a large share of Americans are not aware of the accounts and their purpose. Here's what you should know:
What is a 529 account?
It is a college savings account and is similar to what 401(k) accounts are for retirement. You make contributions to the account. Then those contributions are invested so that the account generates more money. That money grows tax-free and can later be used for college or vocational school.
The name “529” comes from the section in the internal revenue code that outlines the tax policy governing these accounts.
RELATED:Can you change a kid's life with $25? Fund My Future Milwaukee thinks so.
Why use this plan rather than a regular savings account?
These 529 savings accounts help make sure the value of your money grows with the market. If you put a dollar in a savings account, in 20 years that dollar will not go as far because of inflation, since the costs of goods and services rise over the years.
Savings accounts have very low interest rates, ones that typically run far below investment returns. The 529 accounts give more potential for growth. The market does fluctuate, but the idea is to start an account early — again similar to a 401(k) — so the account can absorb those ups and downs and still come out with earnings.
What can the money be used for?
A lot.
The funds can be used for tuition, room and board, books and other equipment at universities, colleges, trade schools and technical schools — any post-secondary education opportunity that qualifies for a federal loan (meaning the federal government does not see it as a risky investment).
Who can use money in the account?
A parent or guardian typically opens the account for their child, who is called the “beneficiary” of the account. The money can be used by the child.
But if the child opts not to pursue any post-high school training or education, the account can be used for educational purposes by a sibling, parent or other immediate relative without any penalty.
The account owner can withdraw funds themselves for non-educational purposes but will have to pay taxes on any earned money.
When should I start saving?
Right now.
The earlier you start the account, the more time your investment has to grow. That can help small amounts turn into thousands of dollars.
For example, if you open an account with $25 and contribute $5 a week for 18 years, you will have about $8,550 to use for college or other training programs — nearly twice as much as you would have if you put that amount in a regular savings account.
What are the benefits of this account?
There are financial benefits and Wisconsin offers tax breaks for residents who contribute to 529 college savings plans.
Research also has found having an account, no matter how much is invested in it, makes it more likely a child will attend college.
One study found that among children who expect to go to college, those with a savings account are six times more likely to attend than those without one.
Having a savings account was a better predictor of whether a child with those expectations would attend college than race or parents’ net worth, the study showed.
Will it hurt a student’s financial aid?
If a parent or guardian opens an account, it typically has a minimal impact on a child’s college financial aid eligibility because it is not considered the student’s income, especially compared to other savings mechanisms.
A 529 account also can be set up by a grandparent, other relative or person. A grandparent-owned 529 plan will have no effect on a student's financial aid eligibility as long as the funds remain in the account, according to the Wisconsin Department of Financial Institutions.
No matter who opens the account, anyone can contribute to it, even if they are not a relative or the person who opened it. A student also can be named the beneficiary of multiple accounts.
When can it be accessed?
The money can technically be accessed at any time, but if you use it for non-educational purposes, you will have to pay taxes on the earned money.
The plans allow for up to $10,000 per year to be used for private K-12 school costs. You also can use money from the account to make a one-time payment of up to $10,000 toward student debt.
In general, the purpose is to save for when a child enters college or other training programs after high school.
What kind of accounts are available in Wisconsin?
Wisconsin has two 529 college savings platforms.
Edvest requires a $25 initial deposit and can be set up online without the help of a financial adviser. It is the platform used by Fund My Future Milwaukee, which has the long-term goal of opening a 529 account for every 5-year-old kindergartener in the city.
Edvest earned a Bronze rating last year, ranking it among the country's top plans, according to an analysis by investment research firm Morningstar Inc.
Tomorrow’s Scholar is an adviser-sold plan, which means it is accessed through a financial planner. It requires a $250 initial deposit.
Tomorrow's Scholar received a negative rating from Morningstar. It was one of eight plans that "charge fees that investors are better off avoiding," the research firm reported.
Do I have to use a Wisconsin plan?
No.
Other states have 529 plans that may work better for your family's needs.
How does investing work?
If you start an account yourself with Edvest, you can pick different levels of investment risk.
The most popular option is a “targeted enrollment” investment, in which your account takes on slightly riskier investments early and then makes more conservative investments as it becomes close to the time for your child to go to college. That helps ensure your account balance does not fluctuate too much right as your child needs it.
Are there fees?
Wisconsin's Edvest has no monthly or annual fees to keep the account open.
It does have asset-based fees based on underlying investment funds and those are indirectly paid, meaning you don't get a bill you have to pay.
If you take money out of a 529 plan for expenses that do not qualify under the educational guidelines, you can face penalty fees. With Edvest, you have to pay state and federal taxes, plus an additional 10% penalty tax on the earned income, not the amount you contributed.
Is there a minimum balance required?
Other than the initial deposit, there is no minimum balance required in Wisconsin’s Edvest plan.
What information do I need to open an account?
To open an Edvest account, you need:
- Your address and birthdate, as well as your Social Security number or tax ID number.
- The birthdate and Social Security number of the child who will be the account beneficiary.
- Banking information (account and routing numbers) for the initial deposit. You also can mail in a check.
Will opening this account disqualify me for public assistance?
It could have an effect, said Linda Lambert, the Wisconsin Department of Financial Institutions' financial capability officer.
States can have differing rules about asset limits — and a 529 plan is considered an asset — for public assistance programs.
In Wisconsin, for example, 529 plans are counted as an asset when determining if someone is eligible for the state's Temporary Assistance for Needy Families program, Wisconsin Works (W-2).
What if I’m undocumented but my child is a U.S. citizen?
Right now, the account owner must have a Social Security number.
Edvest is pursuing an option that would allow a parent who is undocumented to have access to view their child’s account, though they still would not be the account owner, according to Lambert.
“So while it’s not available today, it will likely be in the future,” she said.
If I use a Wisconsin plan, can my child only attend school in Wisconsin?
No.
The Wisconsin plans can be used for post-secondary educational opportunities across the country that qualify for a federal loan.
Have more questions?
Edvest offers a variety of webinars and resources. Other 529 plans offer guides and services. Financial advisers also can answer questions about 529 plans and if they are the best tool for your savings goals.
Correction: An earlier version of this story incorrectly stated a grandparent-owned 529 account could affect the amount of financial aid a student is offered. There is no effect on financial aid.
Contact Ashley Luthern at ashley.luthern@jrn.com. Follow her on Twitter at @aluthern.