529 College Savings Plans

College tuition has historically increased a whopping 6% annually, which makes investing early for college so important. 529 plans are an excellent, tax-free way to save for higher education expenses.

How Much to Contribute

A contribution to a 529 account is considered a gift to the beneficiary. You can gift up to $17,000 to each person ($34,000 for a married couple) each year without any gift tax consequences in 2023. 529 plans fall under a special rule that allows contributing up to five years of gifts at once ($85,000 individually or $170,000 if you are married). A gift tax return is required if you make a gift of more than the annual limit. However, as long as you stay within the 5-year limit, no gift tax is due.

Tax Advantages

Although contributions to a 529 account are not tax deductible for federal tax purposes, contributions grow tax-free and distributions are tax-free—as long as they are used for eligible higher education expenses such as tuition, room and board, books, and supplies. You can also use up to $10,000 per student per year for K-12 tuition expenses; we only recommend this option if you’ve overfunded your 529 account or are in a cash crunch.

Investment Options

529 plans offer a variety of investment choices, which vary depending upon the plan you choose. Our 529 strategy is to invest more aggressively when the child is younger, moving to more conservative investments as the child gets closer to entering college. Since a young child has a long time horizon before needing the assets, a market drop won’t derail your college funding plans. The investment earnings in a 529 are tax-free if used for qualified education expenses, which generally makes these plans a better way to save for college than a brokerage account.

What Happens If the Money Is Not Needed for College?

If the funds in a 529 account do not pay for an undergraduate college program, they can go toward graduate school. Additionally, the account can be transferred to an eligible family member for their own qualified education expenses. An eligible family member is a sibling, cousin, or even a parent or child of the original beneficiary. Withdrawals from a 529 account that don’t go toward qualified education expenses are subject to a 10% penalty, plus federal and state income taxes on the earnings in the account (contributions won’t be taxed). In some cases, the 10% penalty may be waived, but not the taxes; an example is if the beneficiary of the 529 account received a scholarship.

What Happens If You Used Your 529 Funds and Received a Refund from the School?

This is a common occurrence during the pandemic. As long as you deposit the refund back into the 529 account within 60 days, you will not incur taxes or penalties.

529 plans can be an integral part of a college funding strategy to help you reach your goals; the earlier you start, the more time your investments have to grow!