A 529 plan is a savings plan that encourages education savings for qualified higher education expenses – college, vocational, or other post-secondary learning.
Unlike a traditional savings account or bank account, your money grows tax-deferred in a 529 account. Qualified distributions made down the road, when the beneficiary is of college age, are federal tax and state tax free. 529 plans are a great way for parents and families to start early saving for college.
In addition to the tax benefits, funds in a 529 college savings program can see a lot more growth. Funds you in a 529 college savings plan have an average annual rate of return of 6% compared to 0.49% interest in traditional savings accounts. (0.49% is the average rate for high-yield savings accounts, most savings accounts pay even less.)
Different states have different state plans with different investment options and different benefits. You can enroll in any state’s 529 plan that accepts non-resident enrollment. 529 plan funds can be applied to in-state schools or out of state schools, public or private institutions. Additionally, 529 plans can be linked to the Upromise rewards service. Earn an extra $25 bonus when you connect a 529 account to your Upromise profile.
Washington offers two 529 college savings plans: DreamAhead College Investment Plan and Guaranteed Education Tuition (GET).
The DreamAhead College Investment Plan is sponsored by the Washington Student Achievement Council and has no eligibility requirements. Any U.S. citizen or legal resident alien may enroll. The plan is rated 4.5 of 5 stars by T. Rowe Price for its performance history, cost, features, and reliability. This is a direct-enrollment plan (no advisor requirements). A minimum contribution of $25 per portfolio is required to enroll.
The Guaranteed Education Tuition (GET) Program reopened in November 2017 after a two-year freeze to re-structure the program. The State of Washington guarantees that this value of a GET account will keep pace with the cost of college tuition.
This is a prepaid tuition plan that is open to Washington state residents only. The account owner or the beneficiary must be a Washington state resident at the time of the enrollment. There is a $50 paper enrollment fee due at signup; there is no online enrollment fee.
What are the tax benefits of a 529 plan in the state of Washington?
Funds you invest in your Washington 529 plan grow tax-deferred. And funds that the student eventually withdraws from the plan towards qualified educational costs are free from federal taxes.
A common misconception is that these 529 plan assets will disqualify your child from financial aid. On the contrary, 529 plan funds are treated more favorably in the financial aid formula than other savings in your child’s name through a custodial account such as an UTMA/UGMA. This is because assets in a child’s 529 plan belong to the parent not child, and FAFSA (Free Application for Federal Student Aid) gives preferential tax treatment to assets belonging to a student’s parent versus the student.
If your child is an Einstein or football star, and manages to score a free ride to school, you can still repurpose those funds. You can take out an amount equal to the scholarship fund amount from the 529 plan without incurring the 10% penalty tax fee you’d normally have to pay on funds not going to qualified education costs. (You would have to pay regular ordinary income taxes on earnings, but there would be no penalty. Alternatively, you can leave the funds in a 529 plan to be used at a later date by this beneficiary or a direct relative of the original beneficiary.)
And for many, a 529 plan can be used to transfer wealth. Contributing to a 529 plan lets grandparents or other contributors reduce the size of their taxable estate while helping them fund a grandchild’s or family member’s education. It’s even possible to make five years worth of contributions in a single year, up to $75,000 (or $150,000 for married couples) and still get the gift tax exclusion.
Is a 529 plan tax deductible in Washington?
Presently, there are no state-specific tax benefits for Washington state residents.
What happens to a 529 Plan if not used?
There is no time in which the funds within a 529 plan need to be withdrawn. Unused funds can remain in the account and continue to grow tax-deferred.The account owner may also choose to change the beneficiary, without penalty, to an individual with a social security number who is a member of the original beneficiary’s family and a U.S. citizen. This is not limited to immediate family members; funds can be transferred to cousins, nieces, nephews, and other close relatives.
The account owner can close the account if not used, but funds in the account will be subject to federal and state income tax as well as a 10% penalty on the account earnings.
In the event of permanent disability, fund withdrawals may be made without tax penalty.
And as outlined earlier in this article, 529 plans allow the account owner to withdraw the amount a beneficiary receives in scholarships without incurring the 10% penalty.
For Washington state’s GET Plan, there are time restrictions. Units (tuition credits) must be used within 10 years after the beneficiary’s projected college entrance year, or within 10 years of the first use of units, whichever is later.
Can a 529 Plan lose money?
Yes, a 529 plan is an investment plan with different types of investment options. The investment options offer different levels of market risk. Speak with a qualified financial advisor about different investment portfolio options.
Do I need a Washington 529 Plan for every child?
You don’t need a Washington 529 plan for each child but you may find it easier to administer if you do. You can only have one named beneficiary on a Washington 529 plan. The risk and mix of equities to fixed income of certain investment options is determined by the age of the beneficiary. For this reason, you may want to have a different 529 plan for each child.
You may be interested to know that multiple people can open accounts for the same beneficiary.
Can a 529 plan be used to pay off student loans, apprenticeships, and K-12 private schools?
529 plans can be used to pay tuition at K-12 private schools and to pay student loans up to $10,000 annually. 529 plans can also be used to pay for registered apprenticeship programs.
How do financial aid and scholarships affect a 529 plan?
A 529 plan can affect financial aid, but the impact is dependent on the account owner and their tax situation, not the beneficiary.
If the account is held by the parent or guardian of the student, funds within are considered parental assets. The Expected Family Contribution (EFC) calculation for parent assets is a maximum of only 5.64% versus 20% for the students assets.However, if the 529 plan is held by a grandparent or extended family member, while the assets are not taken into account for the FAFSA EFC, distributions from these accounts qualify as student income, which is assessed at 50%.
529 accounts do not affect merit-based scholarships. Other scholarships may depend based on the school.
Start saving towards a 529 plan
Sign up for Upromise and start earning cash back rewards to help save for college. Earn an extra $25 bonus when you connect a 529 account to your profile.
While we are providing general information about the state’s 529 college savings plan, please consult the Plan Description and Participation Agreement for more detailed information and facts about the plan.
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