529 Plans: A Powerful Tool to Save for Education – Morgan Stanley Smith Barney

Of all the things that keep parents awake at night, their children’s looming college costs are among the most daunting. For the 2022-2023 school year, the costs for a four-year private college averaged $57,570 per year for tuition, fees, room and board, books and supplies, transportation and other expenses. Assuming a college-cost inflation rate of 6%, a parent may need $425,500 in 2031 to pay college expenses for today’s 9-year-old. And that’s for just one child.
With costs so high, many students and parents are taking on significant student loan debt to pay for college. Over half of college seniors who graduated in 2020 did so with loans, with an average debt burden of $28,400.
Starting the process early to save toward the college costs of a child or grandchild can help limit how much your future student will have to borrow. Consider putting those funds into a 529 education plan, a tax-advantaged way to invest toward education expenses.
What is a 529 Plan and Why Consider One?
Named after Section 529 of the Internal Revenue Code, a 529 plan is a tax-advantaged vehicle, which allows you to invest for future education expenses. A 529 plan creates an incentive for families to invest toward education costs because earnings in the plan can be tax-deferred, with withdrawals being exempt from federal and, in most cases, state income taxes if you use the funds for qualified expenses, such as tuition, fees, room and board, and supplies. Many states provide additional state tax deductions or tax credits. Additionally, assets in a 529 plan are outside of the account owner’s estate for estate-tax purposes.
A 529 plan can also offer flexibility. Some investments that are used for education funding require that the assets be given to the beneficiary when they reach a certain age. If you open a 529 plan, as the owner of the account, you continue to make all of the decisions. For example, if your daughter earns a scholarship and won’t fully drawdown the money in the account, you can choose a different beneficiary within the same family, or even use the funds for your own education needs.
The definition of qualified education expenses now includes tuition for K-12 schools because of the Tax Cuts and Jobs Act of 2017. Note that qualified withdrawals for eligible K-12 tuition are limited to $10,000 per beneficiary per year. Tax treatment will vary by state.
Igniting a Movement to Save for Education
Still, many are unaware of 529 plans and their benefits. More than two-thirds of people surveyed nationally in 2019 said they haven’t heard of 529 plans.5 “Many people want to save for college, but don’t know where to start,” says Jennifer Tierney, Executive Director, Morgan Stanley Wealth Management Investment Solutions and 529 Plans Product Manager.
Though states began creating college savings plans in the 1980s, they didn’t gain federal tax relief under Section 529 of the Internal Revenue Code until 1996. As a result, those looking to help extended family members may be unaware of 529 plans.
“Many of our clients are grandparents looking to help their children handle future education expenses,” Tierney says. “We encourage them to take a look at 529 plans, which may not have been on their radar the last time they were saving for college.”
529 Contribution Limits
In 2024, annual contributions of up to $18,000, or $36,000 for couples filing jointly, are treated as gifts and qualify for the annual per-beneficiary gift tax exclusion. Additionally, 529 plans employ a special rule: an upfront contribution in one year of up to $90,000, or $180,000 for married couples—the equivalent of five years’ contributions—may be made without any gift tax consequences.
Investing Early for Future College Costs
When it comes to investing in a 529 plan, typically the earlier you can start putting money away, the better.
Still, it’s never too late to start saving for college. Money set aside when a child is 16 will still have several years to grow, assuming you use those funds to pay for the later years of undergraduate expenses, or even graduate school.
A 529 plan is a convenient, flexible and tax-advantaged way to invest for a child’s education expenses. Morgan Stanley offers a robust platform of investment options, including the Morgan Stanley National Advisory 529 Plan a first-of-its-kind advisory 529 plan that enables you to benefit from fiduciary oversight of your education funding strategy within the context of your broader portfolio and life goals. If you have questions or need more information about 529 plans available through Morgan Stanley, contact your Financial Advisor or Private Wealth Advisor today.
Article by Morgan Stanley and provided courtesy of Morgan Stanley Financial Advisor.
Brian Jacobs is a Executive Director in Valencia at Morgan Stanley Smith Barney LLC (“Morgan Stanley”). He can be reached by email at brian.jacobs@morganstanley.com or by telephone at (661)290-2022.