Contributions to college savings plans increase as inflation decreases
Contributions to 529 college savings programs fell late last year and early this year, according to industry data, as consumers generally saved less and struggled with high inflation. But contributions seemed to pick up again in recent months.
The state-sponsored savings accounts, named after a portion of the tax law, can be used to pay for educational expenses, primarily college expenses. Money deposited into the accounts becomes tax-free and is withdrawn tax-free when spent on eligible expenses such as tuition, room and board, and books.
In the first three months of the year, estimated net inflows to 529 savings plans — contributions less withdrawals — totaled $1.6 billion, down from more than $3 billion a year earlier, according to ISS Market Intelligence, a financial research and analysis company. Still, that was an improvement over the fourth quarter of 2022, when net inflows were $1.5 billion. And that fourth-quarter inflow was significantly lower than the more than $4 billion in the same period of 2021.
The drop in contributions was due not only to reduced overall savings and high inflation, but also to the post-pandemic reopening of the economy, releasing a pent-up demand for spending, Paul Curley, director of savings research at ISS, said in an email. .
It didn’t help that last year was a bleak year for investors, including those with money in 529 plans. The losses in 529 plans staggered, especially for families with children who were already enrolled or just starting college and had little time to recover their assets.
“People may contribute less if they feel less wealthy,” said Pam Lucina, chief fiduciary officer for Northern Trust, a financial services company.
The stock market gains this year, along with slowing inflation, have encouraged families to put more money into 529s, Curley said.
Rachel Biar, president of the College Savings Plans Network, a group of state 529 plan administrators, said last year “was a challenging year.” But she added, “We’re seeing contributions come back.”
Contributions to Nebraska’s 529 plan, for example, which Ms. Biar oversees as assistant state treasurer, have returned almost to the same level as a year ago, she said.
Even with the market volatility, Joel Dickson, global head of advisory methodology at Vanguard, said the fundamental value of 529s as a tax-advantaged way to save for education had not changed.
“It still makes a lot of sense,” he said.
At Edward Jones, the annual survey shows that while respondents want to save for college, two out of three don’t know what a 529 plan is, said Steve Rueschhoff, director of managed investments at the company.
A total of 529 plan assets, which reflect deposits and investment gains, reached nearly $409 billion in the first quarter of this year — down from $432 billion a year earlier, but more than 5 percent more than $388 billion at the end of 2022.
Despite recent market swings, 529 plans offer a way for families to reduce the amount they have to borrow for college, Ms Biar said. The College Board estimates that the average annual in-state cost of attending a four-year public university is $27,940, while the cost at a four-year non-profit private university is $57,570.
“We still want people to consider a 529,” Ms. Biar said, adding that most plans have conservative options, including savings accounts that are federally insured, for people who can’t tolerate risk.
The College Savings Plans Network has worked to raise awareness of college savings plans and has encouraged legislation that broadens the allowable use of 529 funds. For example, Congress expanded the allowable use of 529 funds to allow families to save for educational expenses other than school costs, such as school fees for kindergarten through grade 12, as well as for apprenticeships. In addition, up to $10,000 from a 529 can now be used to pay back student loans.
Starting next year, under the Secure 2.0 Act that took effect in 2022, “leftover” funds in a 529 plan can be rolled over to a Roth individual retirement account for the 529 beneficiary. This is helpful, Ms. Lucina said, because some families may be hesitant to contribute to a 529 for fear they will owe taxes and a penalty if they haven’t spent all the money in the account — say, because their child doesn’t attend college — and they withdraw the money for other purposes.
“People are concerned about overfunding the 529,” she said.
Under the new law, up to $35,000 can be transferred from a 529 to a Roth IRA. You can transfer up to the annual maximum Roth contribution — currently $6,500 for those under 50 — each year. If you have more left over, you must carry it over over a period of years.
Other rules apply: for example, the 529 account must have been open for at least 15 years, and no contributions or income from the past five years can be transferred.
But if you don’t meet the rules for a Roth rollover, you can avoid paying taxes and penalties by changing the beneficiary of the 529 account to a sibling or other relative.
With Roth IRAs, you contribute money after taxes — you don’t get a tax deduction, like with a traditional IRA. But if you withdraw money, you usually don’t have to pay tax on the earnings.
“It starts with healthy habits to contribute to a retirement account,” Ms. Lucina said.
Here are some questions and answers about college 529 plans:
Can I get a tax deduction for contributing to a 529?
There is no federal tax deduction for 529 contributions, but many states offer tax breaks.
Do states offer incentives to open and fund a 529 plan?
Each May, many 529 plans offer promotions and prizes to encourage families to open an account and start saving for college. South Carolina, for example, is offering $529 scholarships to parents of babies born in the state on May 29 to fund new FutureScholar 529 accounts. And California is offering a $100 bonus to families who open a ScholarShare 529 account from May 22 to May 31. A list of state promotions is available on the College Savings Plans Network website.
What if my 529 account loses money while my child goes to college?
One option is to consider using other funds – perhaps by taking out student loans – to pay for the first few years on campus, giving the 529 holdings time to recover for later years of college or for the graduate school, Ms. Biar said. You may be able to pay back up to $10,000 in loans with money from the 529.