Happy 529 Day!
May 29th marks the nationwide celebration of 529 Day, an opportunity to highlight the many benefits of 529 education savings plans. As higher education costs continue to soar, many parents face the nagging question, “Will I have enough money to pay for my child’s college education?”
Consider that the average cost of tuition and fees for the 2025-2026 school year, according to U.S. News and World Report, is:
- $44,961 at private colleges;
- $25,415 for out-of-state students at public schools; and
- $11,371 for state residents at public colleges
Worse, from the 2008 edition of the U.S. News Best Colleges rankings to the current 2026 edition, in-state tuition prices among public National Universities grew by almost 79%.
529 Plans Can Help
One often overlooked savings option is a state-sponsored 529 plan. These plans offer great tax benefits while allowing you to contribute substantially higher sums than other savings alternatives.
529 plans generally come in two forms. The first form – prepaid tuition programs – allows participants to lock in tuition rates at eligible state colleges or universities with a lump-sum investment or monthly installment payments. In some states, a portion of the contract value may also be applied to private or out-of-state schools.
The second form – education savings programs – allows contributions to vary. The full value of the account can be applied at any accredited institution of higher education nationwide. Since 529 plans operate under individual state laws, costs and details vary by state.
Substantial Contributions Allowed
Some states allow you to set aside more than $500,000 per beneficiary (with no income or age limits), compared to $2,000 per beneficiary annually for a Coverdell Education Savings Account (formerly known as an education IRA).
Tax Benefits
Although contributions are not deductible at a federal level, earnings in a 529 plan grow federal tax-free and are not taxed when the money is taken out to pay for qualified education expenses. Oftentimes, the 529 account must be open for at least 12 months before any money can be withdrawn, so read the fine print. Further, various states may also offer their own tax breaks, including deductions for certain contributions.
The owner generally retains control of the account and may be assessed a penalty for “nonqualified” withdrawals.
Special Estate Planning Features
One unique feature of 529 plans is that they allow you to move up to $15,000 out of your estate ($30,000 per couple) annually, per beneficiary. Further, current law allows each account owner to pay up to five years of contributions upfront without triggering gift taxes. That means a couple can contribute up to $150,000 per beneficiary in one move.
Other Considerations
Professional Management. 529 plans offer a “hands-off” savings approach: Funds invested in the plan are professionally managed.
Penalty for Refunds. You will be subject to a federal 10% penalty on the earnings portion of a non-qualified withdrawal. In addition, the earnings on nonqualified withdrawals are taxed at your tax rate and not the student’s. However, you may be able to avoid a non-qualified withdrawal by using the funds for various additional qualified uses, including rolling the balance over to a 529 account for another family member.
Effect on Financial Aid. Any investment may affect a student’s eligibility for financial aid. 529 Education savings accounts owned by a parent or the student for the benefit of the student will show up on the following year’s financial aid application as assets. However, withdrawals from a 529 plan are not treated as base year income to the child. Thus, these savings vehicles are considered low impact on financial aid.
It’s Worth a Look
Keep in mind, there is no guarantee that any investment portfolio will achieve its investment goals. The value of your 529 account will fluctuate as the value of the mutual fund shares in which it invests fluctuates, so that your investment, when it is withdrawn, may be worth more or less than its original cost. Also, be aware that out-of-state plans may have in-state income tax ramifications.
For more complete information on 529 plans, contact your financial advisor!
"May Brings a Nationwide Celebration of 529 Day". FMeX. 2022.
