Wisconsin 529 Plan – What You Need To Know

Any time I talk to clients about saving for their child's college education, we end up discussing 529 plans. 529 plans are state-based college savings accounts. The difficult part is that every state has their own 529 plan, and therefore their own rules associated with their plan. Every state is different, so you will have to do a lot of homework on your state’s plan.

In Wisconsin, our 529 plan is called Edvest. Although the state actually controls the plan, they have to hire a company to administer and run it. Edvest recently moved from Wells Fargo to TIAA-CREF, which has made the plan much more attractive. The mutual fund fees at TIAA-CREF are significantly lower, which means more money will stay in your account - which is something I always consider to be a good thing!

What are the tax benefits of a 529 plan?
In Wisconsin, you can deduct up to $3,000 of contributions per beneficiary. Married couples do not get to deduct $3,000 each... it is $3,000 total. If you have 3 children, you can deduct up to $9,000 in a year. Unfortunately, there is NO federal income tax deduction for contributions to 529 plans.

Growth within the 529 plan is never taxed, assuming you use the money for eligible college expenses. Any earnings NOT spent on eligible college expenses will be subject to federal and state taxes, plus a 10% penalty.

What if my kid doesn’t go to college?
As the account owner, you can change the beneficiary once per year. So, if your child decides not to go to college, you can simply change the beneficiary to another child, niece/nephew, or even yourself! 

But my child is really smart - I bet they will get a scholarship!
Wisconsin’s 529 plan allows you to withdraw money tax AND penalty free up the scholarship awarded. If Suzy receives a $10,000 scholarship, you can simply withdrawal $10,000 from the 529 plan that year. Another option is to leave the money in the plan for graduate school expenses. 

What are eligible college expenses?
According to the Edvest website, eligible expenses include “tuition, fees, and the cost of books, supplies... and certain room and board expenses.” Certain room and board has a lengthy definition, but if the student is full-time, you can use the 529 plan to cover the costs..

How should I invest money in the plan?
If you assume that college expenses will continue to go up the way they have been, then growth within the plan will be essential just to keep up with inflation. The Edvest plan has a couple of age-based options that use index funds and have very low costs. I recommend taking a look at the “Age-Based Option” or the “Aggressive Age-Based Option”. These will automatically lower the amount you have in stocks as the child approaches college age.

So do I always recommend 529 plans? No... I am a big believer that your emergency fund should be completely funded, and you should be saving properly for retirement before considering using a 529 plan. Although you have some flexibility, it does lock up the funds for college costs so if you ever needed to money for other expenses, you will be heavily penalized.

I’m also not convinced college education will continue to look how it does today for too much longer. With the creation of free, high-quality college credit classes such as Coursera, I believe we will see sweeping changes in education over the next several years. Regrettably, I don’t have a crystal ball so we have to plan for what we know today, and make adjustments as we go!

If you are thinking about opening a 529 plan in Wisconsin, check out www.Edvest.com. They have a great website with a lot of useful information on there.

Have you ever opened a 529 plan for your kids or grandkids? Would love to hear what your thoughts are on the plan!

Alan Moore is a fee-only financial planner and founder of Serenity Financial Consulting in Shorewood WI. Connect on Google+. You can contact him at alan@serenityfc.com, 414-455-5313, or visit his website at www.SerenityFC.com. Want more education? Download your free guide to the “10 Easy Steps To Securing Your Financial Future Today.”