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The Ins & Outs of 529 Plans

The Ins & Outs of 529 Plans

April 30, 2019

Last week, I posted a blog about the ABCs of Education Investing. I know paying for your child's education may be the furthest from you mind as you approach summer, but needless to say it is NEVER too early to prepare and strategize. 

Let's take a deeper look into the tax-deferred savings vehicle, a 529 plan. Essentially, a 529 plan is a special kind of savings plan that the government created to encourage saving for higher education costs, which grows tax free. And most importantly, parents may not pay taxes on the growth of their savings, which can help lower the cost of funding future college expenses. Please note that every family's financial goals and situations are different. The following information is to be used for educational purposes only. If you'd like to discuss if a 529 is the best option for your individual goals and future outlook, I'd love to sit down and meet with you.


On December 22, 2017, President Donald J. Trump signed new tax legislation into law. The law includes the following provisions related specifically to 529 plan accounts. Beginning with the 2018 tax year, the tax treatment under federal law allows 529 plan account owners to:

  • Use assets in 529 plans to pay for K-12 tuition at public, private, and parochial schools (up to $10,000 per year per beneficiary)
  • Treat K-12 withdrawals for tuition as qualified expenses, which means that earnings on withdrawals are not subject to federal tax or to a 10% penalty
  • Roll over 529 plan account assets to ABLE (Achieving a Better Life Experience Program) plans up to the ABLE annual contribution limit

Does a 529 plan make sense for you? Some things to consider.


The Plan is designed to meet the needs of virtually every family size and budget. There is no minimum annual contribution requirement. You can contribute up to $15,000 per year per beneficiary without incurring federal gift taxes. A 529 plan is the only way to contribute as much as $75,000 in a single year without incurring federal gift taxes.1 The $75,000 counts for a $15,000 gift for the current year and four annual gifts of $15,000 in future years. Married couples who jointly file tax returns can contribute up to $150,000. You can make these gifts to as many beneficiaries as you want without incurring a gift tax. The Plan's overall account balance limit is $400,000 per beneficiary.2


You can use account withdrawals at eligible schools nationwide. The Plan covers almost all expenses related to college including tuition, fees, reasonable room and board, books, and equipment including computers, software, and supplies. Reasonable room and board are considered qualified expenses if the student is enrolled at least half time. If a child decides not to attend college or doesn't use all of the funds, you can change the beneficiary.

As the owner of the account, you may close it or withdraw all or a portion of the funds at any time, even for paying expenses not related to college. However, the earnings portion of funds withdrawn for nonqualified expenses will be subject to the distributee’s income tax rate plus a 10% federal penalty on the earnings portion. If the beneficiary receives a scholarship, the account owner may withdraw up to the amount of the scholarship without incurring the federal penalty on the earnings portion. The penalty is also waived if the beneficiary dies or becomes disabled.


  • The money in a 529 plan must be used for qualified primary, secondary/college expenses. If for whatever reason, your child/beneficiary does not attend college or you chose note to use funds for qualified expenses, you'll be penalized 10% on withdrawals.
  • Make sure you know the fees and risk and understand the investment options. In some cases they can be high and limited.
  • Nonresident Aliens Can’t Open 529 Plans. Only US citizens and resident aliens can open 529 plans
  • Strategies For 529 Plans If Your Child Gets A Full Scholarship Or Chooses A Different Path. If your child gets a full scholarship or decides to delay or forego college, you can switch the beneficiary to a qualified family member or leave the money in the fund in case your child changes his or her mind. You may also withdraw the funds for nonqualified expenses subject to income tax and penalties. Rollover to ABLE is also an option in some cases.

A 529 may make sense for you and your family. It's important to know all of your options, and I encourage you to discuss them with your financial advisor. If I can be of resource, I'd be happy to have that conversation.

Source: TD Ameritrade 529 College Savings Plan

1A donor may elect to treat a contribution to a beneficiary's account as made ratably over a five-year period. As a result a donor may make a contribution to a beneficiary's account of up to $75,000 (or up to twice that much if the donor and his or her spouse elect to “split” gifts) without any negative gift tax consequences, so long as the donor does not make any additional contributions to the account (or any other gifts to the account beneficiary) during that tax year or any of the succeeding four calendar years. A Federal Gift Tax Return (Form 709) is required to be filed. Please consult with your tax or legal professional. If the donor dies before the end of the five-year period, the portion of the contribution allocable to years after the donor's death will be includible in the donor's estate for Federal estate tax purposes.

2You may not make additional contributions to a TD Ameritrade 529 College Savings Plan account once the aggregate amount of contributions to the Nebraska Educational Savings Plan Trust for a beneficiary equals $400,000 or the value of all accounts in the Trust for the same beneficiary reaches $400,000.