529. IRA. 401(k).
Why does everything related to finances often seem like a secret code?
Naming conventions aside, these plans should be a help rather than a hindrance. And for anyone considering pursuing higher education, it’s important to understand the options that a 529 plan can provide.
This overview of 529 plans can help you understand what they are, how they work, and whether they could be a good option for you!
**Note: As Auguste Escoffier School of Culinary Arts is based in the United States, the information provided here is specific to American students. International students should consult the tax codes of their respective countries. Nothing in this article is intended to be professional tax advice. Always consult a tax advisor regarding your specific situation.
What Is a 529 Plan?
A 529 plan is an investment account specifically designated for education expenses. This could include the cost of college or university, vocational school, apprenticeship programs, K-12 education, and student loan repayments.
A 529 plan can be started by the beneficiary (aka the future student) or it can be started by a family member or friend on behalf of the beneficiary. This is usually a parent or grandparent, but it doesn’t have to be.
There are two primary types of 529 plans: college savings plans and prepaid tuition plans.
College Savings Plan
The most common type of 529 plan is a college savings plan. This type of account can be used for any eligible, accredited post-secondary institution, including a two-year or four-year college or vocational school. It can even be used for student loan repayments.
Contributions to a 529 college savings plan are made with after-tax dollars. That means that these contributions come from income after any federal or state taxes are deducted. But the growth on those contributions is tax-deferred. So as the account grows, you do not have to pay additional taxes on those earnings. And when you withdraw the funds to use for qualified educational expenses, you don’t have to pay any income taxes on that money. Pretty neat!
You may also qualify for a state tax deduction based on your contributions. These amounts vary from state to state, so check with your state’s tax authority.
When it’s time to go to school, the money in a 529 plan can be spent on “qualified education expenses.” That may include tuition and fees, books and materials, room and board, and supplies—when they’re a required expense of participating in class. That means that students studying in online culinary school, pastry school, or plant-based culinary school at Escoffier can pay for their laptops, internet access, and ingredients for their assignments with their 529 funds! Check with your specific plan for more guidelines on what is included.
Prepaid Tuition Plan
With a prepaid tuition plan, you can do just that: pay for college tuition in advance. With this type of account, you buy “units” or “credits” to be applied to college tuition later. But you buy them at today’s rates, instead of the rates at the time the student attends school. With the rapidly increasing costs of education, this can be a great way to save on future school expenses!
Once you’ve purchased your units, the plan administrator will invest those funds so they continue to grow in the intervening years. And they have the same tax-free growth and withdrawals as a college savings plan.
There are limitations to the prepaid tuition plan model, which may make this a less appealing choice for some. To start, these plans are usually sponsored by state governments. So they may be limited to public in-state schools. And they can only be used for tuition and fees, not for additional costs like books, supplies, and room & board. As of February 2023, the following states offer prepaid tuition plans that are open to new enrollment:
- Florida
- Maryland
- Massachusetts
- Michigan
- Mississippi
- Nevada
- Pennsylvania
- Texas
- Washington
You can get links to your state’s college savings plans and/or prepaid tuition plans at www.collegesavings.org.
There is also the option to begin a Private College 529 Plan. This plan is not limited to a specific state and can let you prepay tuition at nearly 300 private colleges across the country. While you don’t have to choose your school at the time you open the account, you are limited to the schools that participate in the plan.
Investment Accounts, Explained
What do we mean when we say “investment account?”
An investment account holds stocks, bonds, mutual funds, and other assets. As those assets grow, so does the value of your account! But the value of those assets can also decline.
Examples of investment accounts include IRAs and 401(k)s for retirement, 529s for education, and standard brokerage accounts that aren’t earmarked for any particular use.
Investing is different than saving. A savings account stays relatively static, only earning modest interest. An investment account, on the other hand, has the opportunity to grow much more over the same period of time, as the value of stocks and bonds increases. Plus as your balance grows, you accumulate more earnings as both your contributions and the dividends/interest that you earn are invested in more assets. This is called compounding and it can account for impressive growth over time.
Can You Use a 529 Plan to Pay for Culinary School or Trade School?
A 529 plan is earmarked for qualified education expenses at eligible schools. And that may include certain culinary school and trade school programs, including those at Auguste Escoffier School of Culinary Arts!
Schools must be accredited to be eligible for funding through a 529 plan. Accreditation is how schools verify that they meet certain standards of curricula and rigor. Escoffier’s Austin and Boulder campuses (including online programs available through our Boulder campus) are both nationally accredited!
You can do a quick search for the schools you’re considering to see if they qualify.
What Are the Benefits of a 529 Plan?
So why go to the trouble of setting up a 529 plan? Here are the benefits of this type of school-specific investment plan.
Investments Grow Over Time
With any investment account, including a 529 plan, you can put your money to work. Investments in stocks, bonds, mutual funds, and commodities (like gold and other precious metals) have the potential to grow significantly over time.
Consider two different circumstances. Mary plans to save money for her daughter for school for the next 10 years. She plans to set aside $200 per month. If she puts that $200 into a savings account with a 0.23% interest rate (the average rate as of February 2023), she would have $24,454.58 for her child. And $24,000 of that is what she contributed. So she only earned $454.58 in interest.
Now let’s say she instead decides to set up a 529 plan. It’s impossible to say exactly how her investments will perform. But if we assume a modest 5% rate of return, Mary may have $30,512.72 at the end of 10 years. So she earned $6,512.72…by contributing the exact same number of dollars.
That means the 529 plan would have earned over 14 times the amount of the savings account!**
Do the math. A 529 plan may help you save on college costs and taxes.
Investment Growth Is Tax-Free
In the example above, Mary has earned over $6,500 for her child’s education. She has already paid income taxes on the $24,000 that went into the account. And she will not have to pay any income taxes on that $6,500 that she earned. That’s because the money earned in a 529 plan is not subject to income tax or capital gains tax.
This is one of the reasons that people choose to start 529 plans for education expenses, instead of a more flexible brokerage account. The income from a brokerage account is usually subject to income tax and/or capital gains tax.
Some States Offer Tax Deductions for 529 Contributions
Of the 42 states that require state income tax, 36 offer some kind of tax deduction for 529 contributions. So in addition to earning more on your investments, you may be able to save money on your state taxes.
Note that most states that offer a deduction only do so when you participate in the state’s 529 plan.***
529 Plans May Have a Modest Impact On Financial Aid Eligibility
It’s very common to have a 529 plan and still need some outside funding for college. So you may be wondering how this type of plan could impact your eligibility for financial aid.
There are many factors that go into the impact of your plan on your financial aid package, including who owns the plan (the student, parents, grandparents, extended family), and how much it’s worth. For example, if a parent owns the account on behalf of their child, the full value of the account must be reported on the Free Application for Federal Student Aid (FAFSA®). Around $10,000 in the account is generally disregarded in the financial aid calculation. For the remainder, a maximum of 5.64% of the account is subtracted from the financial aid package. That means for an account of $15,000, a student’s financial aid package could be reduced by $282 (5.64% of $5,000).
But this is only the case when the 529 plan is owned by a student or parent. If it’s owned by a grandparent or other family member, the distributions from the plan must be reported on the student’s FAFSA®. And this could have a greater impact on the student’s financial aid eligibility. (But good news for grandparents—the rules are expected to change for the 2024-2025 school year, with grandparent-owned 529s treated more like parent-owned 529s!)
If these parents start 529 plans for their young kids, the impact on their future financial aid eligibility may be low.
How Much Can You Contribute to a 529 Plan?
Unlike some other types of investment accounts (like IRAs, for example), there are no annual contribution limits to a 529 plan. But a 529 contribution is considered a gift by the IRS. Any gift over the federal threshold of $17,000 (for the 2023 tax year) will trigger a federal gift tax. So many 529 contributors keep their annual contributions under that threshold to prevent the tax.
These plans also usually have a total contribution limit. The amount varies from state to state, but the limits range from $235,000 in Georgia and Mississippi to $550,000 in West Virginia.
Common Misconceptions About 529 Plans
- 529 plans are only for college and university students. Not true! A 529 plan can be used for eligible culinary and trade schools, K-12 education, vocational school, and even for student loans!
- 529 plans are a big gamble…what if my child doesn’t go to college? As the owner of the account, you set the beneficiary. And you can change the beneficiary at any time. They just have to be a relative of the original beneficiary. So you could use the funds to pursue education yourself, support another family member, or even pay off old student loan debt.
- 529 plans are only for tuition expenses. For a prepaid tuition plan, this is true. But for a college savings plan, the funds can be used for tuition and fees, room and board, books, computers, and other supplies.
- A 529 plan will prevent the beneficiary from getting financial aid. Not necessarily! When the plan is owned by the beneficiary or their parent, the reduction in federal financial aid may be minor. This decrease may be higher if a grandparent or other relative owns the plan.
- The funds in a 529 plan will go to waste if my child gets a scholarship. Scholarships can work in conjunction with a 529 plan to reduce a student’s dependence on loans. Plus, scholarships are often only for tuition, while the 529 funds can be used for additional expenses as explained above. And you can always change the beneficiary to use the funds for another relative!
What If You Want to Use 529 Funds For Non-Qualified Education Expenses?
If you want to use your funds for something other than education expenses, you can. BUT your distributions could be subject to normal income taxes and a 10% tax penalty, depending on where you live. So think it through! Depending on the size of the account, that could be a large loss.
There may be some exceptions to the penalty, like:
- The beneficiary gets scholarships for school
- The beneficiary passes away
- The beneficiary gets tuition assistance through an eligible employer program
- And some others.
Who Should Consider a 529 Plan?
529 plans are often started by parents for their kids. With a long runway ahead of them, the growth on a 529 plan can be substantial between the child’s early years and when they’re ready for college.
But these plans aren’t just for kiddos! Anyone considering going back to college or graduate school can open a 529 college savings plan. They can earn some extra money for their education and save on taxes all at the same time. Since these plans compound over time, the longer the plan has to grow, the better.
And if the saver changes their mind about going to school, they can transfer the funds to another 529 account for their kids or spouse. And if the new beneficiary has already attended college, they can use those funds to pay off their student loans.
There are age limits to some state 529 prepaid tuition plans, so check the rules in your state’s plan.
There is no age limit for 529 college savings plans! So older learners can still reap the benefits.
Consider Adding a 529 Plan to Your Financial Strategy!
A 529 could be just one part of the overall financial plan. Between an investment account, scholarships, military or veterans benefits, and student loans, students may be able to assemble all the funding they need to achieve their education goals if they apply and qualify. If you have questions about funding your education, we’re here to help. Contact our Financial Aid department to get answers to your questions and bring culinary school within reach!*
To learn more about financing your culinary school education, try these articles next:
- Can You Deduct College Tuition from Taxes?
- How Much Does Culinary School Cost and How Can You Pay For It?
- How Long Does It Take to Pay Back Student Loan Debt…And Is It Worth It?
*Information may not reflect every student’s experience. Results and outcomes may be based on several factors, such as geographical region or previous experience.
**529 plans may incur fees, so always read the fine print before starting any new financial plan.
***Always consult a tax professional for specific information on deductions.
