Thursday, February 15, 2024

The Complete Guide to CHET 529 College Savings Plans

CollegeThe Complete Guide to CHET 529 College Savings Plans

The Complete Guide to CHET 529 College Savings Plans

By Tommy Martin, Financial Advisor

In February of 2021, the CHET 529 plan changed management from The Hartford Funds to Fidelity Investments. Due to this change in administration, many of the existing CHET 529 plan guides online are no longer accurate. 

As a financial advisor who manages Advisor CHET 529 accounts through Fidelity Investments, I can see a noticeable difference in management styles between the two. For example, Fidelity tends to be more restrictive in its administration. Without proper communication, Fidelity might code certain transactions as taxable events. 

I hope you find this guide to be current and accurate with Fidelity Investments as the manager.

Table of Contents

What is a 529 College Savings Plan?

The U.S. Securities and Exchange Commission (S.E.C.) defines a 529 plan as a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code (I.R.C. § 529). 

There are two types of 529 plans: prepaid tuition plans and education savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan.

Today, we will be reviewing the 529 Education Savings Plan.

The Connecticut Higher Education Trust (CHET)

The Connecticut Higher Education Trust (CHET) 529 Education Savings Plan is a direct plan offered by the Treasurer of the state of Connecticut and managed by Fidelity Investments. 

Connecticut offers two different types of 529 Plans: the education savings plan (our topic herein today) and the prepaid tuition plan. All fifty states provide at least one type of 529 plan, including Washington D.C. 

Tax Advantages of CHET

Investing in the CHET 529 may come with some tax advantages. As long as you keep your money invested in the account, no income taxes will be due on earnings. In addition to the possibility of tax-free earnings, you may also receive tax deductions up to $5,000 for individuals and up to $10,000 for married couples. 

When you take money out to pay for qualified education expenses, those withdrawals may also be federal income tax-free —and in many situations, free of state tax as well.

Are 529 Plan Contributions Tax-Deductible?

Much like the Roth I.R.A., contributions made to a 529 plan are made after-tax. Therefore, they are not deductible from federal income taxes. However, many states offer state income tax deductions or tax credits for contributions to 529 Plans. Connecticut is one of those states.

However, to receive these tax deductions or credits, Connecticut residents are restricted to investing in the CHET 529 plan, at least for the first year.

Who Can Open A CHET 529 Plan Account?

Any U.S. resident may open a CHET 529 plan account. Unlike retirement plans, there is no income restriction to open an account. The only requirement is that:

  • You must be a U.S. resident.
  • Be at least 18 years of age.
  • have a U.S. mailing address (can be a P.O. Box)
  • have a legal address (where you reside)
  • and a Social Security number or Tax ID
  • What can you pay with your CHET 529 plan?

Who Can Be A Beneficiary?

Generally, anyone can be named the beneficiary of a 529 plan. It doesn’t matter the beneficiary’s relationship to the account owner. In addition, the beneficiary can be anyone of any age, as long as they are a U.S. citizen or resident alien with a social security number or federal tax identification number. 

Also, a beneficiary can have more than one account. For example, a beneficiary’s parents may open a CHET 529 plan account for their child, and that child’s grandparents may have opened another account. Or a parent may have opened two CHET 529 plan accounts for their two children. 

CHET 529 – 2021 Contribution Limits 

According to federal law, the most a family can save in a 529 plan account is the cost of higher education. However, with the wide disparity in the price of college, this can be a confusing guideline.

Because of I.R.S. gifting rules, it’s safe to assume that the CHET 529 allows investors to save up to $15,000 per parent or $30,000 per couple

What Can You Pay With Your CHET 529 Plan?

As of 2021, qualified expenses including tuition expenses for elementary, middle, and high schools (private, public, or religious). Although the money may come from multiple 529 accounts, only $10,000 can be spent each year in total per beneficiary. In addition to college, 529 plans can pay for elementary, middle, or high school tuition. The law also allows for an aggregate lifetime limit of $10,000 in qualified student loan repayments per 529 plan beneficiary.

Here’s a list of common educational expenses and their qualification status:

Type of expenseCan you use 529 money?
Tuition and feesYes. 529 plan money can be used to pay the full amount of college tuition and required fees. Limited to $10,000 per year for K-12 private tuition.
Books and suppliesYes, for college expenses only.
Computers and internet accessYes, for college expenses only.
Room and boardYes, for college expenses only. Students need to be enrolled at least 50% of the time. 
Special needs equipmentYes, for college expenses only.
Transportation and travel costsNo. Transportation to and from campus, airfare or gas, are not qualified expenses.
Health insuranceNo. Health insurance is not a qualified college expense, even if it is offered through the school.
College application and testing feesNo, not a qualified college expense.
Extracurricular activitiesNo, not a qualified college expense.
Student loansYes, up to $10,000 lifetime limit for each beneficiary.

Advisor CHET 529 Plan Accounts

When opening your CHET 529 plan account, you have a couple of options. You can have the option of opening an account directly through Fidelity Investments and deal with them yourself, or you can open your account through a financial advisory practice like mine and have us manage everything.

One of the most significant advantages of using an Advisor CHET account is that your financial advisory team can manage your investments on your behalf. In an Advisor CHET 529 plan account, we help choose the investments, and we instruct Fidelity Investments to make trades or account changes on your behalf. And, when you need money for college, we will get a check in the mail for you. No more long calls waiting to get a representative and having to deal with people that use industry jargon. 

Should You Use Connecticut’s CHET 529 Or Another Provider?

There are compelling reasons for Connecticut residents to utilize the CHET 529 education savings plan. The most compelling of these reasons are the tax deductions or credits. 

If you choose a different 529 plan, you might not get those deductions or credits. 

CHET 529 Plan Investment Options

Investment options for your CHET 529 plan account have changed since management moved from The Hartford Funds to Fidelity Investments. Furthermore, Fidelity’s investment options can be confusing, using terminology like “investment pools.”

Pooled funds are funds in a portfolio from many individual investors that are aggregated for the purpose of investment. Mutual funds, hedge funds, exchange-traded funds (ETF), pension funds, and unit investment trust (U.I.T.), are all examples of professionally managed pooled funds. Investors in pooled funds benefit from “economies of scale,” which allow for lower trading costs per dollar invested, and diversification. 

Through CHET 529, Fidelity Investments offer a number of investment strategies: static portfolios, individual fund portfolios, age-based portfolios, and bank deposit portfolios.

Portfolio typeAllocation choices
Static portfoliosAggressive Growth Portfolio (Fidelity Funds)
Moderate Growth Portfolio (Fidelity Funds)
Conservative Portfolio (Fidelity Funds)
Aggressive Growth Portfolios (Fidelity Index)
Moderate Growth Portfolios  (Fidelity Index)
Conservative Portfolio (Fidelity Index)   
Individual Fund PortfoliosMoney Market Portfolio
Fidelity 500 Index Portfolio
Total Market Index Portfolio
International Index Portfolio
Intermediate Treasury Index Portfolio
Bank Deposit PortfolioBank Deposit Portfolio
Age-based PortfoliosAge-Based Portfolio (Fidelity Funds)
Age-Based Portfolio (Fidelity Index)
Age-Based Portfolio (Multi-Firm)   

Once you’ve set up your CHET 529 plan, you need to choose your investments. If you have an Advisor CHET through my team, we can help advise you or pick them for you based on your risk tolerance and time horizon. If you don’t know what your risk tolerance is, you can use our risk tolerance tool.

A Word of Caution About Age-Based Funds

You’ve probably seen target-date funds or age-based funds through a 401(k) style retirement plan. This is where you choose a fund based on your target retirement year. For example, if you turned 65 years old in 2040 and that’s your target year to retire, you would choose the 2040 Retirement fund. 

Age-based funds work similarly with 529 plans. The closer your beneficiary gets to college, the more defensive the fund gets. The closer you get to college, the more it will buy into bonds and hold onto cash. 

I think the point here is to understand what you are investing in and how those investments work. I would be disappointed to find out that I missed out on a good year because my funds sold out of stock and moved into bonds and cash.

College Savings or Retirement Savings?

I think every parent battles with the question, “Which is more important: College Savings or Retirement Savings? In the financial services industry, we always say, “There are student loans for college. There aren’t any loans for retirement.” And, in the air travel industry, they say, “Put your mask on first. Then, help your children with theirs.”

There’s something to that. Our children are not our retirement plan. As much as they love us today, our children will not be keen on us using their homes for retirement. I understand that some of us do and wouldn’t mind. But, by large, it’s an inconvenience that not many of us want to sign up for. 

This is my view. You are welcome to have a different one.

Get Your College Budget Report

The cost of college widely depends on your family’s financial resources, family size, academics, the school you want to attend, and much more. Unfortunately, most families do not have the financial fluency it takes to calculate how much all four years of college will cost, let alone how to pay for it all.

Our College Budget Report will give you the key answers you need. Do you qualify for need-based financial aid? What about merit-based scholarships and grants? Let us show you what colleges and universities are looking for in your tax returns.

Neither Independent Financial Group (IFG) nor any of its affiliates offer lending or repayment advice. The views expressed are those of the presenting party and may not express those of IFG or its affiliates. The information presented is for educational purposes only and is derived from sources assumed to be reliable. It is not to be relied upon as tax, legal, or financial advice, nor used for the purpose of avoiding any tax obligations. Please contact a qualified professional regarding your individual circumstances.

For Educational Purposes Only – Not to be relied upon as financial, tax, or legal advice.  The views expressed are those of the author/presenter and all data is derived from sources believed to be reliable.

Tom Martin, WMCP®
Tom Martin, WMCP®
Tom Martin, is a financial advisor at Vaylark Financial Services, based in Hartford, Connecticut. He practices in the area of private wealth management offering comprehensive financial planning, custom investment portfolios, tax reduction strategies, risk management, estate and legacy planning, as well as advises on executive compensation and business owner profitability.

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Tom Martin, is a financial advisor at Vaylark Financial Services, based in Hartford, Connecticut. He practices in the area of private wealth management offering comprehensive financial planning, custom investment portfolios, tax reduction strategies, risk management, estate and legacy planning, as well as advises on executive compensation and business owner profitability.

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