Note: If you purchased Washington GET units before July 1, 2015 and you’d like to roll the money over into a DreamAhead college savings plan, there is a special rollover price available until September 12, 2018.
Passport to the future. Weapon of change. And a human right with immense power to transform.
Education has been called all of these, and more.
Unfortunately, a good education doesn’t come cheap. The cost of tuition, a dorm room, meals, books and general living expenses can all strain the finances of even affluent families.
Research indicates that slightly more than 30 percent of parents start to save for their child’s college education by the time the child is two years old. To provide a tax-advantaged way to save, Congress legislated the original 529 plan in 1996.
Introduction to 529 Plans
529 plans, named after the relevant section of the Internal Revenue Code, are actually state- and sometimes university-sponsored tuition savings plans. The legal name is actually qualified tuition program.
These plans offer federal tax advantages when used for the qualified education expenses of a designated beneficiary — such as a child or grandchild, or even an unrelated person. Originally intended to encourage savings for college, they can now be used for any qualified education institution, including colleges, universities, vocational schools, as well as for tuition at K – 12 public, private and religious schools.
As the contributor to a 529 plan, you are not limited in terms of the number of plans you can establish, with one designated beneficiary per plan. You can also invest in the 529 plan of any state or educational institution that offers a plan. You’re not restricted to your own state.
Further, you are not limited in any way based on your income or that of your beneficiary.
Types of 529 Plans
There are actually two types of 529 plans: college savings plans and prepaid tuition plans. While states can offer either, educational institutions are limited to prepaid tuition plans.
College Savings Plans
These plans are essentially tax-advantaged investment accounts, similar to traditional IRAs. After-tax contributions to the plan are tax deferred and, generally, distributions are not subject to tax. You assume all investment risk.
The only limitation is that your contributions cannot exceed the amount of your beneficiary’s qualified tuition expenses.
Qualified expenses include the following:
tuition and fees for colleges, universities and other post-secondary institutions
up to $10,000 each year for K – 12 tuition at public, private or religious schools
certain costs for room and board
computer and peripheral costs and internet access
any special needs equipment
The funds cannot be used to repay student loans or for transportation expenses.
If your contributions to the plan exceed qualified expenses the unused (undistributed) earnings are subject to penalty and tax. Your contributions to the plan were already taxed as they consisted of after-tax funds.
Prepaid Tuition Plans
These plans allow you to buy tuition units at today’s prices to lock in costs. One year’s tuition is equal to a predetermined number of units, and that number of units doesn’t change over time as tuition costs increase.
In general, the units are only good for public institutions, not private ones — and the price-guarantees only apply to those in the state that offered your units. If your beneficiary chooses to attend a public or an out-of-state institution you must cash out the units. And because the number of units required for a schools tuition can vary from school to school, your cashed-out units may not cover a full year’s tuition at the new school.
Washington State’s 529 Plan Options
Washington state currently offers two 529 plans: the prepaid tuition Guaranteed Education Tuition Plan, or GET, and a newer college savings plan called the Dream Ahead College Investment Plan.
Guaranteed Education Tuition Plan (GET)
GET is Washington’s prepaid tuition plan, initially offered in 1998. It is open for enrollment each year from November through May, at a current price of $113 per unit.
Under the GET program, 100 units is equal to the cost of one year of resident, undergraduate tuition and fees at Washington’s highest priced public university. However, you can use the units at public and private schools across the country and, in some cases, internationally. You just don’t get the same guarantee about how much of the cost those units will cover at these schools.
DreamAhead College Savings Plan (DreamAhead)
The DreamAhead plan is Washington’s version of a college savings plan, created in 2017. As with the GET plan, you can use the money in the account for virtually any public or private school in the country and, in some cases, internationally.
You can open an account for yourself or anyone else you wish with a minimum investment of $25. Friends and family can also contribute to the account by making gift contributions.
Each account is limited to only one beneficiary and the total contributions to all Washington 529 accounts (DreamAhead and GET) for the same beneficiary cannot exceed a $500,000.
Rollover Options to DreamAhead
Generally, you can roll over money into a DreamAhead account from an existing 529 plan without federal income tax consequences, as long as the beneficiary for both plans is the same person. You also must wait 12 months from the date of the last 529 rollover for that beneficiary to avoid tax consequences.
If you are changing beneficiaries and the new beneficiary is a family member of the previous beneficiary, you can roll over money from a 529 plan account into your DreamAhead account at any time, without federal income tax consequences.
Expiring Options for GET Accounts Purchased Before July 1, 2015
The price of a GET unit is tied to the cost of tuition in Washington and the related GET program costs. By 2012, the cost of a GET unit had risen to $172, reflecting rising tuition.
The Washington legislature took action in 2015 to cut tuition costs and limit future increases. As a result, the GET program had an excess of cash and the price of GET units came down.
To assist those who paid the higher prices for their units, the legislature decided to offer three temporary options for GET units that you purchased before July 1, 2015
Keep Your Units You can do nothing and simply keep your GET units. If you choose this option, you can potentially receive up to two automatic adjustments that add units to your account.
The first adjustment is for GET accounts with an average unit price of $117.82 or more for GET units purchased before July 1, 2015. In general, the difference between your average unit price and $117.82, multiplied by the number of your qualifying units establishes the dollar amount of this adjustment. Then divide this dollar amount by the current price of a GET unit ($113) to determine the number of additional units you will receive.
The second adjustment will be made only if, after the first adjustment, the program is determined to remain overfunded. If so, this second adjustment may add a maximum of 15 percent to the number of your GET units.
Rollover Your Units You also have the option, available only through September 12, 2018, to roll your entire GET account into a DreamAhead account at the price of $143 per GET unit.
Cash Out Your Units To provide you with additional time to determine the best 529 plan for you, you can request a refund with no program penalties attached.
If you choose this option, you will receive an amount equal to the greater of $117.82 per GET unit or the value of your initial contributions.
Note that federal tax rules require you to reinvest the funds in another qualified 529 plan within 60 days or you are subject to federal taxes and penalties on any gains. This option also expires after September 12, 2018.
What Is the Best Option?
The best option for you depends on a number of personal and financial considerations, so there is no simple answer.
In very general terms, you get more for your money by rolling GET units into a DreamAhead plan than by choosing the additional GET units. The price difference ($143 for the rollover vs. the current unit price of $113) is meant to compensate you for the additional risk in the DreamAhead plan, as you lose the state guarantee.
If you’re absolutely sure you will send your child to a Washington school and/or you don’t want to worry about whether the account will have sufficient money to send them, you may prefer GET with its tuition guarantee.
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