A Comprehensive Guide To The 529 Savings Plan 

Michael Goldenberg |


Below is a comprehensive guide to the 529 savings plan. 

If you need a quick summary on the topic, here's what it boils down to 529 plans are flexible, useful, and allow you to grow your money in a tax-free manner. Individual equities are not generally available with these programs, but they do provide many investment alternatives. There are taxes on gains and possibly fines if the money isn't spent on education. If the funds are used for education, they will grow tax-free for the designated beneficiary. In the future, a beneficiary can be changed. 

Now let's discuss it in detail. 

If you’re a parent of a child who may be heading to college in the future, it’s likely that you’ve thought about how to pay for their tuition. But paying for college is no small feat—Forbes has estimated that the price of a college education has increased 8 times faster than wages, making it a struggle for even upper-middle-class families. When factoring in the cost of tuition along with room and board, books, and living expenses, a college education can quickly become an unaffordable luxury. While there are many options available for savings plans, one of the best ways to be prepared for the cost of college is to start saving early. 

A tax-advantaged 529 plan is one way to consider putting money away early. One of the biggest advantages of investing in a 529 plan for your future college student is that the money will grow tax-deferred, and distributions will be tax-free as long as they’re used for college tuition or related expenses. Operating much like at 401(k) or IRA, funds deposited into a 529 plan are not taxed, either by the federal government or the state in which the participant resides. The plan allows funds saved to be used at any eligible educational institution, which typically includes colleges, universities, vocational schools, or any post-secondary educational institution that is currently eligible to participate in U.S. Department of Education student aid programs. 

529 plan was originally created in 1996 to help save for future education expenses and give tax incentives to those who placed money into these accounts. A law passed in 2017 now allows funds from 529 plans to also be used to pay for K-12 tuition and fees, as well as private and religious school tuition. Plan participants are permitted to withdraw up to $10,000 each year for primary and secondary education. It's critical that anybody considering withdrawing funds for this purpose contact the state where their plan is located to make sure they're following the new federal restrictions since withdrawing funds in a non-participating state can mean a hefty penalty. For instance, if you withdraw $10,000 and only use $8,000 to pay for tuition one semester with plans for using the rest to pay for the next semester, you may be subject to a penalty fee. 

529 plan savings can also be used for vocational or trade schools as well and you can also use 529 plan funds to pay for your own schooling as well. That’s why more families are turning to a 529 savings plan. A 529 plan offers families a way to save money for educational expenses with plan participants making contributions using after-tax dollars. While there are no formal limits to what can be contributed to a 529 plan, plan participants should note that the gift tax exemption for 2022 is $16,000, so any contributions above that amount would have to be noted on Form 709 – United States Gift Tax Return. 

Many 529 plans also offer tax benefits at the state level. Depending on where you live, you may be eligible for a state income tax deduction or tax credit for contributions to a 529 plan. As far as I know, these plans are the only savings plans that offer tax benefits at the state level.  

There are currently two types of 529 plans available, a savings plan and a prepaid tuition plan, with states typically offering both types of plans. The savings plan is designed similar to a retirement plan, with funds invested as directed. The prepaid tuition plan allows you to pay tuition through installment payments but typically does not include room and board. Currently, educational institutes can offer a prepaid 529 plan but not a 529 savings plan. And like any retirement plan or IRA, you’ll want to remain cognizant about where your money is invested, keeping in mind that you should probably move to more secure investment options as college approaches. 

There is no use it or lose it restriction on 529 plans, so even if plan funds are not used for educational purposes, plan holders only pay taxes on any amounts earned through the plan, with no taxes paid on the original investment, whether used for educational purposes or not. For instance, if you have contributed $20,000 to a 529 plan, and the current plan balance is $25,000, if you choose to withdraw the entire amount for a non-education-related reason, you will only pay taxes on the $5,000 in earnings. If the entire $25,000 is used for educational purposes, no taxes are assessed. 

You are not restricted to investing in a plan offered by your home state, however, state tax benefits on plans available in your residency may be limited. The majority of plans do not restrict school participation to the plan's originating state, but it's always advisable to double-check with the institution to make sure they're an eligible institution under 529 plan rules. 

While there are a lot of tax benefits for a 529 plan if you’re someone who prefers to have a lot of control over your investments you may want to consider saving elsewhere. Many 529 plans have limited investment options, including static investment portfolios to mitigate risk and age-based portfolios that enable you to be more conservative the closer your child is to college age. It may be a good idea for an experienced investor to handle his or her own investments. However, if you're comfortable with a hands-off approach to investing for your child's future, this isn't necessarily a disadvantage. 

However, there is still a lot of flexibility within other areas besides investments. You can invest in any 529 plan no matter what state you live in or where your child plans to go to college, which gives you many options to choose from. There’s no requirement as far as household income or regular contributions. The 529 plan also has a lot of flexibility with beneficiaries. If your child decides not to go to college you can transfer funds to another child or even to yourself if you’re thinking of going back to school with no risk of distribution penalties.  

With tuition prices increasing and many people unable to afford college, the possibility of establishing a 529 plan for your children might be beneficial. If you are considering opening a 529 plan, it's best to do so as soon as possible to get the maximum growth opportunity. A great vehicle for saving for college tuition and related college expenses, and now even private elementary and secondary school tuition, be sure to check with your state to determine what plans are available and what would work best for you. If you have questions about the specifics of investing in a 529 savings plan, reach out to a financial professional for help.  

As usual, let me know if you find this article useful or have comments on the subject. 

Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer's official statement and should be read carefully before investing. 

Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investment in any state's 529 Plan. 


Michael Goldenberg, CFP®  

CEO/Co-Founder, Senior Financial Advisor 

AFIN Family Wealth Management  

1220 Kensington Rd, Suite 220, Oak Brook, IL 60523 Cell: 773- 865-5130 Office: 630-686-1463 Fax: 630-686-1467  

mgoldenberg@afinwealth.com    www.afinwealth.com  


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