529 Plans Help Delaware Parents Save for Their Children’s Education

Saving for college? Learn more about federal tax-free plans for First State residents.

Ideally, the time to start saving for your children’s college education is when they’re still too young to understand what college is. Last year, Delaware began offering additional financial incentives when parents or caregivers do so.

“I’m proud that our office sponsors the DE529 Education Savings Plan and takes the lead in raising awareness about the importance of saving for a higher education,” Delaware state treasurer Colleen Davis announced last May 29, the date—5/29—the state set aside to publicly promote the plan.

It’s named after Section 529 of the federal tax code passed by Congress in 2015, which was later amended to promote savings for education, a plan that taxes neither savings gains nor withdrawal of the funds as long as they are used for education. They can be used to pay for college in any state.

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In 2022, the General Assembly passed legislation to establish a $1,000 tax deduction for contributions made to Delaware’s 529 plan and a $5,000 tax deduction for contributions made to a 529a (DEpend)ABLE account for people with disabilities. Additionally, Delaware’s First State, First Steps incentive program contributes $100 to a new 529 account if the student beneficiary is under age 5 and is a Delaware resident, and if a minimum of $100 has been contributed to the child’s college fund.

Although 529 is a federal initiative, each state and the District of Columbia administer the program for its residents by establishing how investment firms, such as Fidelity Investments or Merrill, can participate. Parents can choose which firm to invest their contributions with and how much they want to save. (The U.S. average savings for four-year colleges is about $20,000. Of course, there are additional living expenses for students attending college out of state or who want to live on campus in-state rather than at home.)

“Couples need to have a conversation early about how much of their children’s tuition they want to pay—and they don’t always agree on this,” says Joan Sharp, founder of River Family Advisors in Wilmington. “Some want to pay everything, while others want children to help earn it [because] they feel the student will do better if they have some skin in the game.”

They grow up quickly. It’s never too early to start saving for college. Fortunately, government tax-free 529 plans just got a little sweeter.
They grow up quickly. It’s never too early to start saving for college. Fortunately, government tax-free 529 plans just got a little sweeter. Adobe Stock.

Bill Starnes of Mercer Advisors, also based in Wilmington, says he supports a rule of thirds. “I have always considered it to be a reasonable, affordable, shared-payment method for one-third [of college expenses] to be presaved by the parents, one-third to be paid by the parents’ current income, and one-third to be paid by student loans or by student employment while in school.”

“If possible, it also makes sense for parents or caregivers to start early—even if they can only afford $15 to $20 a month.”
—Joan Sharp, founder, River Family Advisors

If possible, it also makes sense for parents or caregivers to start early—“even if they can only afford $15 to $20 a month,” Sharp notes—and to contribute more as their income grows. While 529 plans are typically preferred due to their tax advantages, you can also set up your own investment funds, even if you pay taxes on gains. “Additionally, grandparents may want to have their own savings plan or to give a lump sum when the grandchild starts college,” Sharp says. “Or they can set up a trust fund.”

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Choosing a firm? Start by asking these questions:

  • What services does the investment firm offer? Do you want a firm you already work with? If you don’t already have a financial advisor, which one offers additional services you might need in the future?
  • What is their performance record in managing 529s and other investment plans?
  • What type of investment options do they offer? (Ask about plans based on your child’s current age or multiple plans if you have more than one child.)
  • What are the management fees and other direct or indirect costs of investing?

Sharp notes an increasing number of 529 options, including using savings for primary and secondary education in addition to college. A plan can also be transferred to another family member if the original recipient decides not to attend college or dies. Beginning in 2024, up to $35,000 can be rolled into a Roth IRA from a 529 that’s been open for at least 15 years.

Starnes notes that parents should also consider their own self-interest. “Paying for college should not jeopardize [their] own financial security or result in the need for them to work beyond age 70,” he says.

Related: 3 Families on Tackling College Tuition in Delaware and Pennsylvania  

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