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: August 26, 2021

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is an investment plan in which contributions plus any earnings grow tax-deferred and remain tax-free if the funds are withdrawn to pay for certain qualifying education expenses.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 also be used for K-12 school tuition.

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


529 plan do’s

Here are some of the qualified education expenses you can pay with your 529 plan:

  • 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 used for college
    • Educational special services
  • Payment of college loans up to a lifetime maximum withdrawal of $10,000
  • Tuition and qualified expenses for apprenticeship programs


529 plan don’ts

These are some of the non-qualified college expenses for which a withdrawal would be 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 above $10,000
  • Transportation/travel/parking
  • College application fees
  • ACT, SAT, or other college prep examination fees


529 plan benefits

Key benefits of a 529 plan include:

  • 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. You can contribute up to $15,000 ($30,000 per married couple) annually per beneficiary to qualify for the annual gift tax exclusion.
  • Anyone can contribute. Friends and other family members can send in contributions to an established 529 plan account 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. For example, you can choose to contribute a lump sum of up to $75,000 (or $150,000 for joint-contribution) in one year and elect to have the contribution considered “spread” over five years. This essentially allows you to use five years of annual gift exclusions in one year. This larger gift wouldn’t be subject to the gift tax if the person who made the gift lives for the full five years. This feature can be an effective strategy for long-term estate and gift planning, as the larger upfront gift helps to remove those assets from the donor’s estate and maximize compound growth inside the 529 plan. Talk to a financial professional and tax professional for more details.


529 plan options

Be sure to understand all costs associated with the plans you’re 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.

  • Advisor-sold vs. direct-sold 529 plans
    • 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.
  • 529 plans vs. prepaid tuition plans
    • A 529 plan allows contributions to be invested and any gains are tax deferred. Assets in the 529 plan can be used for many qualified expenses to most any educational institution.
    • Prepaid, state-offered tuition plans allow residents to secure only future tuition costs at today’s rates.  There may be limitations on the educational institution accepting the prepaid tuition plan.


Adding a 529 plan to your existing investment strategy

Depending on your overall investment and portfolio strategy, you can choose between a static or age-based strategy when structuring your 529 plan’s investments inside the 529 plan account.

  • 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? Assets owned by a dependent student or a parent/s are considered parental assets. When determining whether a student qualifies for financial aid, only 5.64 percent of 529 account balances are counted as parental assets. Assets of a 529 plan owned by a grandparent or third party have no effect on FAFSA eligibility. However, the income considerations on the student’s FAFSA depend on who is named as the owner of the 529 account:
    • If a parent or student 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 student 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.

For more information regarding college savings plans, please visit www.collegesavings.or.  Participation in a 529 plan does not guarantee the investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses.  Before investing in a 529 College Savings Plan, consider your state of residence, which may offer a 529 College Savings Plan with state tax or other benefits available only to residents of the state.  Federal income tax on the earnings and a 10 percent penalty on distributions for non-qualified expenses may apply.