How Can I Pay for College? 529 Plans are Increasingly Popular

More affluent Americans are answering the question, “How Can I Pay for College?” by investing in 529 plans, which offer a convenient, tax-advantaged way to finance higher education.

Assets held in 529 plans grew 12 percent to $133 billion in the 12-month period ending September 30, 2011, thanks to a bull market and increased cash contributions, according Morningstar Inc., which tracks the mutual fund industry. During the same period the U.S. equity market was up about 1 percent and U.S. bonds increased more than 5 percent.

The tax benefits and liberal contribution allowances make 529 plans especially appealing to affluent investors. An increasing share of Americans with investable assets of $100,000 to $1 million participated in 529 plans in 2011, according to a fourth quarter wealth study by Millionaire Corner. Twelve percent of these affluent households held 529 accounts at the end of 2011, a 30 percent increase from the fourth quarter of 2010, when 9 percent had 529 plans. The average balance is up slightly to $17,000, a modest increase for $16,410 at the end of 2010. 

Participation is 529 plans is higher for millionaires, who are more likely to view 529s as a solution to concerns over “How can I pay for College?” About 15 percent of investors with $1 million to $25 million have 529 plans. The average balance for high net worth millionaires – those with $5 million to $25 million – is $92,000.

The plans, named after a section of IRS code, are offered by every state in the union, though rules and fees differ from state to state. Investors are free to select from any state’s offerings and can use their 529 savings to pay for a college in any location. According to Morningstar, the state of Virginia 529 plan has attracted the most investment and managed $29.8 billion in assets as of the third quarter of 2011.  Investors are primarily out-of-state residents attracted by the relatively low fees in Virginia’s CollegeAmerica plans. The state of New York manages the next largest 529 program, which boasts $11 billion in assets, and New Hampshire comes in third, with $9.2 billion invested in its 529 offerings.

Earnings in 529 plans are exempt from federal income taxes and some also offer tax breaks to in-state residents – as long as the withdrawals are used for approved purposes, such as tuition. Wealthy investors can benefit from liberal contribution allowances of up to $300,000 per plan and they also appreciate the control they maintain over how and when the funds are spent. The plans also offer automatic payment options and day-to-day management of assets, making 529s a relatively convenient solution to the dilemma of “How can I pay for college?”