What You Need to Know About 529 Plans


Tuition costs only continue to increase, making education planning even more important. In honor of 529 plan day, we decided to give a quick overview of some of the most important features 529 plans offer!


What is a 529 Plan?

A 529 savings plan is a tax-advantaged college savings account. A 529 plan is funded with after-tax dollars which grow tax-deferred when invested. Any money you pull out of the account is tax-free when used for qualified education expenses.


While 529 plan contributions are never tax deductible on the federal level, some states may consider 529 plan contributions as tax deductible. You will need to check with your 529 plan or your state to find out if you’re eligible.


Depending upon the state you live in, your 529 Plan may have a maximum contribution limit. State contribution limits typically range from $200,000 to $500,000.


You must be 18 years old or older to open a 529 plan. Typically, 529 plan account owners name their child or grandchild as beneficiary, but the account owner can always create one for him/herself.


Types of 529 Plans

College Savings Investment Plans

The first, more traditional type of 529 plan is the savings-based 529 plan. With this savings account, your contributions are invested, and the growth of your funds depends upon investment performance.


The other main type of 529 plan are pre-paid tuition plans. Offered in select states, pre-paid tuition plans lock in today’s tuition costs. While this may seem like a great thing to do, the downfall is that your return is only equal to tuition inflation.


What can you use the funds for?

For the distributions from a 529 plan to be “qualified,” the funds must be used for qualified education expenses. These include tuition, books, and room and board for students that are enrolled at least half-time.


529 plans can be used for any eligible educational institution, including graduate, professional and trade schools. What’s even more beneficial about 529 plans is that, as of 2018, you can distribute up to $10,000 per student per year for private K-12 tuition.


Investment Options

For a traditional 529 plan, you can invest your contributions. Different 529 plans have different investment options, and typically, the investments fall under two umbrellas.


First is the age-based approach, where your asset allocation gradually becomes less risky as the student gets older. The other approach is the static option, where your allocation remains the same over time. Either way, you can align your allocation to your risk tolerance and objectives.


Saving for the rising cost of college education is difficult enough as is, be sure to review the administrative and fund expenses of your 529 plan as they can often be quite expensive. It is not uncommon for the same funds you might own in a brokerage account or IRA to have a much higher expense ratio inside a 529 plan.



With 529 plans, there is only one account owner and one beneficiary. You can however, own more than one 529 plan and beneficiaries can benefit from multiple accounts. Anyone can contribute to the 529 plan, even if they are not the account owner. What’s also advantageous about 529 plans is that the account owner can change the beneficiary to one of the beneficiary’s relatives, if needed. For example, if the beneficiary doesn’t end up going to college or passes away, a close relative can be named the new beneficiary. If the account owner dies, a new account owner can be named as well.


With ownership of 529 plans, it’s very important to consider who the owner is for financial aid purposes. Often, owners of 529 plans are either the parent or the grandparent.


For parent-owned 529 plans, the account is treated as an asset of the parents for financial aid purposes, which means that 5.64% of the value is counted towards the Expected Family Contribution (EFC) amount. However, when funds are distributed from the 529 plan, it is not counted as income for financial aid purposes.


If the 529 plan is owned by the grandparent, it’s reverse! The account is not counted as a parental asset for financial aid purposes, but the distributions will be treated as income of the student.


Strategy for Distributing Funds for Grandparent-Owned 529 Plans  

Originally, it’s been said to wait until the student’s senior year to distribute funds from a grandparent-owned 529 plan because income in the current year would count towards financial aid in the subsequent year.


During the Obama administration in 2015, the “prior-prior year” rule was created. This rule says that the FAFSA application will use income from the prior-prior year. This means that the student will be free to take distributions starting in their junior year, without adverse effects on their financial aid for Senior year.


We hope that this 529 plan overview has been helpful to you! Please feel free to reach out to us if you have any questions on how to start planning for education costs.


This information is not intended to be a substitute for individualized financial advice and we suggest you discuss your specific situation with a qualified financial advisor.

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