Contributions to College Savings Plans Pick Up as Inflation Eases
Contributions to 529 college savings programs fell late last year and early this year, according to industry data, as consumers saved less overall and battled high inflation. But contributions appeared to be rebounding in recent months.
The state-sponsored savings accounts, named for a section of the tax code, can be used to pay for education expenses, primarily college costs. Money deposited in the accounts grows tax-free and is withdrawn tax-free when spent on eligible expenses like tuition, room and board, and books.
In the first three months of the year, estimated net inflows to 529 savings plans — contributions minus withdrawals — totaled $1.6 billion, down from more than $3 billion a year earlier, according to ISS Market Intelligence, a financial research and analytics firm. Still, that was an improvement over the fourth quarter of 2022, when net inflows were $1.5 billion. And those fourth-quarter inflows were significantly lower than the more than $4 billion in the same period of 2021.
The drop in contributions was a result of not only reduced overall savings and high inflation but also the postpandemic reopening of the economy, which released 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 dismal year for investors, including those with money in 529 plans. The losses in 529 plans stung, especially for families with children who were already enrolled or just starting college and had little time for their holdings to recover.
“People may contribute less when they feel less wealthy,” said Pam Lucina, chief fiduciary officer for Northern Trust, a financial services firm.
The stock market’s gains this year, along with slowing inflation, have encouraged families to put more money into 529s, Mr. Curley said.
Rachel Biar, chair of the College Savings Plans Network, a group of state 529 plan administrators, said that last year “was a challenging year.” But she added, “We do see contributions coming back.”
Contributions to Nebraska’s 529 plan, for example, which Ms. Biar oversees as the state’s assistant treasurer, have rebounded almost to the same levels as a year ago, she said.
Even with the market volatility, Joel Dickson, global head of advice 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, principal of managed investments at the company.
Overall 529 plan assets, reflecting deposits and investment gains, reached almost $409 billion in the first quarter of this year — down from $432 billion a year earlier but up more than 5 percent from $388 billion at the end of 2022.
Despite the recent market fluctuations, 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 college is $27,940, while the cost at a four-year private nonprofit college 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 been working to expand awareness of the college savings plans and has encouraged legislation that broadens the allowable uses for 529 funds. Congress, for instance, has expanded the permissible use of 529 funds to allow families to save for educational expenses other than college costs, like tuition for kindergarten through Grade 12, as well as for apprenticeships. Plus, up to $10,000 from a 529 can now be used to repay student loans.
Starting next year, under the Secure 2.0 Act enacted in 2022, “leftover” funds in a 529 plan can be rolled over into a Roth individual retirement account for the 529’s beneficiary. This is helpful, Ms. Lucina said, because some families may balk at contributing to a 529 out of fear that they will owe taxes and a penalty if they have not spent all the funds in the account — say, because their child doesn’t go to college — and they withdraw the money for other purposes.
“People get worried about over-funding the 529,” she said.
Under the new law, up to $35,000 can be transferred from a 529 to a Roth I.R.A. You can transfer up to the annual maximum Roth contribution — currently $6,500 for people under 50 — each year. If you have more than that left over, you would have to transfer it over a period of years.
Other rules apply: The 529 account, for instance, must have been open for at least 15 years, and no contributions or earnings from the last five years can be transferred.
Still, if you don’t meet the rules for a Roth rollover, you may avoid paying taxes and penalties by changing the 529 account’s beneficiary to a sibling or another family member.
With Roth I.R.A.s, you contribute money after taxes — you don’t get a tax deduction, as with a traditional I.R.A. But when you withdraw money, you typically don’t have to pay taxes on the earnings.
“It starts healthy habits of contributing 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 money to a 529?
There is no federal tax deduction for 529 contributions, but many states offer tax breaks.
Do states offer incentives for opening and funding a 529 plan?
Each May, many 529 plans offer promotions and prizes to encourage families to open accounts and begin saving for college. South Carolina, for instance, is offering grants of $529 to parents of babies born in the state on May 29, to fund new FutureScholar 529 accounts. And California offers a $100 bonus to families that 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 as my child is entering college?
One option is to consider using other funds — perhaps by taking out student loans — to pay for the first years on campus, giving the 529 holdings time to recover for later years of college or for graduate school, Ms. Biar said. You could potentially repay up to $10,000 in loans using funds from the 529.
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