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Wealth Management

How to open and invest in a 529 plan

When it comes to saving for your children’s education, 529 plans may be one of the most effective options available.

Tags: Education, Investments, Planning
Published: October 28, 2019

A 529 plan is an investment plan in which contributions plus any earnings grow tax-deferred and remain tax-free if the funds are withdrawn to pay for certain qualifying education expenses. In addition to college tuition, 529 plan funds can now also be used for elementary and secondary school tuition.


However, 529 plans come with stipulations and options. Here’s what you need to know.


529 plan do’s

You can pay for these qualified education expenses:

  • K-12 tuition
  • College tuition and fees, including:
    • Room and board
    • Off-campus rent when student is at least part-time
    • Books and supplies
    • Computers and software
    • Educational special services


529 plan don’ts

You can’t pay for these non-qualified college expenses without being subject to taxes and a 10 percent withdrawal penalty on earnings:

  • Electronic devices used primarily for everyday or entertainment purposes, such as mobile phones
  • Sports or club activity fees
  • Student loan payments
  • Transportation/travel/parking


529 plan benefits

Remember these four key benefits of a 529 plan:

  • Ownership is flexible: There is no requirement to turn account ownership over to the beneficiary at a certain age. Generally a parent is named as the owner, but others such as a grandparent, aunt, or uncle can be named as owner. Be sure to understand financial aid considerations in ownership.

  • Accounts are transferable: Should the original beneficiary choose not to attend college (or doesn’t need the funds for another reason, such as a scholarship), the beneficiary can be changed to another relative of the original beneficiary without tax consequences.

  • Contributions are flexible: The amount you put in is flexible, and monthly contributions can be as low as $15 a month. Contribute up to $15,000 ($30,000 per married couple) annually per beneficiary in order to qualify for the annual gift tax exclusion. Anyone can make contributions to an established 529 plan account; friends and other family members can send in contributions to help build funds for education costs.

  • Provides for legacy planning: In addition to paying for education, 529 plans can be used for certain estate and tax planning strategies. Talk to a financial professional and tax professional for more details.


Key 529 plan options

Consider these details when choosing a plan.

  • Enrollment options: Advisor-sold vs. direct-sold
    • Advisor-sold plans are offered through an advisor, managed professionally and can include broader investment options. Additional costs apply.
    • Direct-sold plans are offered directly through a state to its residents or non-residents.
    • Be sure to understand all costs associated with the plans you are comparing.
    • Research whether your state of residency offers a 529 plan (whether advisor-sold or direct-sold) that provides a state tax deduction for making contributions.
  • Types of plans: 529 plans vs. prepaid tuition plans
    • A 529 plan allows contributions to be invested and any gains are tax deferred.
    • Prepaid, state-offered tuition plans allow residents to secure only future tuition costs at today’s rates.


Adding a 529 plan to your existing strategy

Depending on your overall investment and portfolio strategy, you have options for structuring your 529 plan’s investments inside the 529 plan account.

  • Static vs. age-based strategy
    • Static portfolio options allow you to have control over the allocation of equity and fixed-income percentages by selecting among portfolios managed to a more specific stated investment objective.
    • Age-based portfolio options are set up to reallocate over time and become more conservative as college enrollment approaches.


529 plan final considerations

  • When should I enroll? You can start investing as early or as late as you want. However, starting early and making regular contributions may benefit your overall strategy.

  • How will a plan impact FAFSA eligibility? Both assets owned and income for the parent and the student are factors in the financial aid equation. When determining whether a student qualifies for financial aid, only 5.64 percent of 529 account balances are counted as student assets, if the student is only the beneficiary of the account. That’s a minor impact when valuing assets owned by the parent and those owned by the student in the FAFSA application. Assets of a 529 plan owned by a grandparent or third party are not counted as assets of the student.


However, the income considerations on the FAFSA application depend on who is named as the owner of the 529 account: 

  • If a parent owns the 529 account, distributions made for qualifying expenses are not considered part of the student’s income when applying for aid in subsequent years.
  • Distributions made from 529 plans opened by grandparents or third parties are considered the student’s untaxed income and assessed at 50 percent for the FAFSA in the subsequent year. This would have the effect of reducing aid by 50 percent of the amount withdrawn.


Learn how we can help you plan for your children’s education.