529 Savings Plans

Brian Wegman, CPA (Sep, 2018)

Cooler temperatures, changing leaves, and back to school - fall is certainly here.  While your little ones may be off to start the new school year, now might be the perfect time to begin planning for their future education.  One of the best ways to financially prepare for college is through the use of a 529 Savings Plan.  At the core, a 529 Plan is a tax-advantaged way to save for future education.  The Tax Cuts and Jobs Act (TCJA) made some changes to expand 529 Plans which now also allows savings to be used for K-12 education (more on this later).

For some basics, 529 Plans come in two general forms, both of which aim to make savings for college a little easier.  The options are the Education Savings Plan option and the Prepaid Tuition option. 

The Education Savings Plan option allows you to set aside money for a beneficiary (accounts can be opened in plans that are sponsored by states, state agencies and even some educational institutions) to withdraw tax-free when used to pay for qualified higher education expenses.  You may open a plan in any state, and different plans offer different benefits so it may make sense to look around.  Qualified higher education expenses include tuition, room and board, and other mandatory fees and expenses (including books, computers and software, if they are required as part of admission).  The investment options may vary depending on the provider used to open the account, but may include mutual funds, exchange traded funds and potentially accounts that are guaranteed by the Federal Deposit Insurance Corporation (FDIC). 

The Prepaid Tuition option, sponsored by various educational institutions, allows you to buy in to current tuition prices at those institutions, even if your student will not be heading off to college for 18 years.  The prepaid option is specifically designed to pay for tuition and mandatory fees, and is not set up to pay for room and board. 

Contributions to a 529 Plan, which are considered gifts for federal tax purposes, are only limited by the federal gift exclusion, meaning that in 2018 any one person may contribute up to $15,000 per beneficiary.  Each state limits the total balance that can be maintained in a 529 Plan based on the expected costs of the beneficiary's qualified higher education expenses.  If that limit is reached, no additional contributions are allowed unless the balance in the account falls back beneath the limit.

One of the biggest changes to 529 Plans is the ability to use the funds for K-12 education at public, private or religious schools.  When using the funds for K-12 education, withdrawals are limited to $10,000 per year, a limitation that does not exist when used for eligible college expenses.  As a word of caution, some states may limit or recapture the tax benefits associated with contributions if the withdrawals are used for K-12 education.  For example, in preliminary guidance, New York State has noted that these expenses are not considered qualified distributions and that distributions are subject to recapture of tax benefits received.

An additional change affecting some beneficiaries of 529 Plans relates to tuition refunds.  If a student receives a refund of tuition or any other qualified education expense, they may return the refund to the 529 Plan tax-free.  Returning this amount back to the plan would not count against the contribution limits. 

There are several significant benefits to 529 Plans.  Aside from the tax free growth, contributions to the plans can have state level benefits as well.  Many states offer tax deductions or credits on the contributions.  For example, New York State offers up to a $5,000 deduction for single filers (or $10,000 for married couples filing jointly).  For those wishing to give a larger amount (through the use of a 5-year election), up to $75,000 ($150,000 if married filing jointly) can be given to a beneficiary and the contribution is treated as having been given equally in $15,000 amounts over 5 years.  Finally, amounts contributed to a 529 Plan can be rolled into an ABLE account as long as it is for the same beneficiary or for a family member of the original beneficiary (ABLE accounts are a way to save funds to support individuals with disabilities for certain expenses including health, housing, education and many other support services).  Balances rolled into an ABLE account combined with other ABLE contributions cannot exceed the yearly ABLE contribution limit, which is $15,000 in 2018.

In addition to rolling a 529 Plan into an ABLE account, you may also change the beneficiary of a 529 Plan.  There are not any tax consequences of making such a change, but there is a limitation.  The new beneficiary must be a member of the family of the original beneficiary. 

There are some additional things to consider with a 529 Plan.  Withdrawing money from the account for non-qualified expenses will cause to the withdrawn earnings to be subject to tax as well as a 10% penalty.  Investment options may be limited as well and depend on what is offered by the agency that is sponsoring the plan.  Once the investments are made, changes are limited to two times per year, but also may be changed if the beneficiary changes.  Balances in 529 Plans may affect eligibility for needs-based financial aid. 

A 529 Plan can be a great way to prepare for future educational expenses (and now current educational expenses), but there can be a lot to consider.  For additional information or questions, contact an advisor at Dermody, Burke & Brown.


The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.

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