Is a 529 Plan Right for My Kids?


Lauren Pitman

Author, Attorney

For many, college is a rite of passage into adulthood, a time to make memories, create lasting friendships, and grow into the adult you will become. As college becomes increasingly expensive, it requires a great deal more planning in order to afford it.

As an estate planning attorney, I’m used to thinking ahead and planning in great detail, especially when it comes to your financial future. If you have young people who plan to go to college in your life, setting up 529 plans might be a great financial tool to have in your toolkit.

What is a 529 plan?

A 529 plan is a financial tool for saving for college. It offers a tax benefit for the person who creates the account as long as the money is used for higher education tuition and paid directly from the account to the school. Some private primary and high schools also qualify for a 529 Plan. These qualified withdrawals are tax-free (though they may incur state taxes, depending on the state).

With a 529 Plan, you can give up to $15,000 per year per beneficiary ($30,000 from a couple) without any tax penalty or reporting. You may also make the gift up to 5 years in advance, so you could give up to $75,000 (or $150,000 from a couple) per beneficiary as long as you claim the tax benefit in each year for the total of 5 years.

It’s important to note that the $15,000 is a reporting requirement at the federal level only.

Currently, the federal exemption rate is $11.7 million dollars, but that number could be lowered under the current administration. Any gifts made that exceed $15,000 a year to any one individual, will reduce that lifetime gift and estate exemption by the amount over the annual $15,000 limit. Parents and grandparents can use 529 plans to reduce their own estate size thereby reducing potential estate tax liability. Of course, individuals should consult their own attorneys about the impact gifting may have on their own estate plan as the federal laws change often and state laws may all be different.

There are no contribution limits to a 529 plan, but the balance of the account cannot exceed a reasonable cost of education: up to about $500,000.

What are the benefits of a 529 plan?

The benefits of 529 plans are threefold: you can help a loved one afford college tuition, save money on taxes, and save time for your beneficiaries after you die.

First, a 529 plan is designated to pay for education expenses, but it’s not limited to expenditures to the college alone. It can pay for other types of education, including primary and secondary school, private lessons, or other education-related expenses such as books.

Qualified distributions from the 529 plan are tax-free, so there are no tax implications to the student who receives the funds, and there are no penalties for you, either.

Because a 529 plan can have a beneficiary, it will pass directly to the child in the event that you die before it is used. That means there’s no hassle in transferring the funds, and they won’t incur a tax penalty.

How does a 529 plan affect financial aid?

A 529 plan is not generally owned by the minor/child who will one day attend college. It’s owned by the parents who create the account. It counts as a “parent asset” on the FAFSA form. But 35 states also offer a tax credit for creating a 529 plan, and some states and cities even match contributions or make a small donation to the 529 plan if it’s created by the child’s first birthday. Some of these incentives might come in handy, even if they don’t outweigh the benefit of federal financial aid.

Other people can contribute to the 529 plan: in fact, some people have fundraisers or request that high school graduation gifts go directly into the child’s 529 plan to help pay for college. The financial tools are becoming more sophisticated to match the changing needs.

Are there minimum contributions?

Minimum contributions vary by account, but some can be very low. Consider the fees of the account when selecting which 529 account might be right for you.

When it comes to choosing the right financial tools, consult with your financial advisor, your estate planning attorney, and the other people on your team. It takes a village to help children get through college these days, so you’ll need the right people on your side to make education dreams a reality.

To learn more about estate planning and similar topics, head to Side by Side Planner.


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Disclaimer: The information contained in this article should not be considered tax or legal advice and is not a substitute for such advice. State and federal laws change frequently and the information in this article may not reflect your own state's laws or the most recent changes in state or federal law. For current tax and legal advice, please consult with an accountant or attorney licensed to practice in your state.

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