529 Plans: What You Need to Know

Written by Scott Benjamin

April 13, 2021

A 529 plan is a way to develop tax advantaged savings to pay for education. These plans are typically used for college savings, but can also be used for K-12 private school education. 529 plans offer you the ability to have all contributions grow taxed deferred. Additionally, money can be withdrawn tax free if it is used for qualified education expenses. These types of expenses include tuition and fees, room and board, and necessary materials such as books. Withdrawals can also be used for technical and vocational school tuition, fees, and materials. Keep reading to learn more about 529 plans and how to use them to your advantage.

How do they work? 

With a 529 account, a person, most likely a parent, can set it up to allow a specific beneficiary to utilize the funds to pay for qualified education expenses. The account holder will deposit after-tax money into the account. The funds can grow tax-deferred and withdrawn tax-free for the qualified expenses. While parents are the typical account holders, grandparents and other relatives can be account holders as well. Another option is to open a 529 for yourself and fund your own expenses from the 529. This would be especially beneficial if you are planning to go back to school.

What if my child chooses not to pursue higher education? 

The beneficiary on the account can be changed to another family member who utilizes the funds for his/her education expenses if your child chooses not to go to college or vocational school. If the money cannot be used, it will have to ultimately be withdrawn at a certain point in the distant future. Unfortunately, you will have to pay taxes on the earnings and a 10% penalty.

How can I best use my withdrawal? 

Only withdraw from your 529 account in the calendar year that you incur the qualified education expenses. The withdrawal and expense should match for the year. Failing to do so will result in the withdrawal being categorized as unqualified since you will not be using the funds to pay current expenses. To be sure you are in the clear, keep receipts of your education expenses that were reimbursed by your 529.

Are there contribution limits? 

According to the IRS, contributions are not allowed to exceed the amount that is necessary to pay for the qualified education expenses of the beneficiary. 529 plans do not have specific contribution limits. Certain states do have imposed limits running from $235,000 to $529,000. Annual gifts up to $15,000 qualify for the annual gift exclusions. Lump sum contributions up to $75,000 can be made upfront, but no other contributions are allowed for five years if this option is exercised.

529 plans are a great option for families who want a tax advantaged way to save for their children’s education. Most plans have investment options based on age so the investment will become more conservative as the beneficiary approaches college age. With college expenses rising every year, it is important to start saving for your children as soon as you can. Contact us today with any questions you have about saving or planning for college. 706.426.4243 or schedule an appointment here to get started!