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The Case For 529 Plans

10/29/2020 - Investing for Life, Starting a Family

Open notebook with the words College 529 Savings Plans Open notebook with the words College 529 Savings Plans

In a recently published Morningstar report, researchers drew upon data from the Federal Reserve Bank’s “Survey of Consumer Finances” and the Sallie Mae/Ipsos survey “How America Saves for College” to create two savings simulations. In the first simulation, families continued on their current course, which relied in part upon using ordinary savings and checking accounts for the accumulations. The second simulation exclusively used 529 plans for saving the same amount of money for college.

The researchers found that utilizing the 529 plan would increase the amount available for college by roughly 25%. Most of the increase was attributable to the superior investment earnings, not to the tax benefits, although state tax benefits and capital gains tax benefits did play a role. In the aggregate, the report concluded that an additional $237 billion would be available for higher education through full usage of 529 plans, without anyone saving an additional dollar.

Spreading The Word

The researchers then tested three approaches to presenting information about 529 plans to see what might be most persuasive to prospective savers. These included:

  • a table summarizing the benefits and drawbacks of 529 plans;
  • a graph comparing the financial benefits of 529 plans to other account types; and
  • an infographic to simplify the process of signing up for a 529 plan.

They found that the first two approaches did increase usage of 529 plans, while the third one did not. They also warned that what is true in the aggregate may not be applicable to an individual family. Personalized advice is essential to match individual family circumstances to the optimum choice in a 529 plan.

© 2020 M.A. Co. All rights reserved.
Any developments occurring after February 1, 2020, are not reflected in this article.

Content is for informational purposes only and is not intended to provide legal or financial advice. The views and opinions expressed do not necessarily represent the views and opinions of WesBanco.

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