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Strategies to maximize benefits and avoid mistakes. 

There is a great quote that goes something like, “It’s not what you don’t know that hurts you, it’s what you know for sure that just ain’t so.” Now, we would love to give appropriate and accurate credit but a quick Google search reveals too many opinions to count regarding the quote’s origination. Citations include Mark Twain, Will Rogers and Leo Tolstoy. Suffice to say, the quote did not originate with us.


Just like with pop-culture quotes, there can also be confusion around financial topics. Saving, and eventually spending, for college is no different. A few commonly held misconceptions about 529 College Savings Plans include:



False. Anyone can open a 529 Plan and name anyone as the beneficiary. The owner of the Plan is permitted to change the beneficiary to another qualified family member, such as siblings, nieces, nephews, grandchildren or even themselves! More importantly, anyone can contribute to your 529 Plan.


Currently, contribution limits are $15,000 per person to any 529 Plan in any calendar year. That includes parents, grandparents, aunts, uncles, neighbors…anyone can contribute to anyone else’s 529 Plan. Contributions in excess of $15,000 per person would need to be reported to the IRS as a gift. However, a 529 Plan can be “superfunded” with contributions of up to $75,000 per person (that strategy would use up your federal gift-tax exclusion for the following 5 years and would need to be reported on a gift tax return. It is probably best to coordinate with both your financial and tax advisors if you are considering this option).


Unlike custodial accounts, the money in a 529 Plan remains controlled by the owner and there are no required minimum distributions such as those associated with retirement accounts. You can let the money remain invested in the account in anticipation of the beneficiary continuing on to graduate school or other post-secondary institutions. Should you consider one of these options, remember to realign your investment strategy with a potentially longer time horizon.



False. 529 Plan assets can be withdrawn for a variety of education-related expenses including room and board, textbooks and computers. As of 2018, qualified expenses were expanded to include elementary, middle and high schools whether private, public or religious. You may choose to make payments directly from your 529 Plan or you may choose to pay bills first and then reimburse yourself from the 529 Plan. Either way, it is important that withdrawals match the payment of qualifying expenses in the same tax year – not academic year. 


There are, of course, ineligible expenses such as off-campus housing in excess of the school’s
estimates for on-campus room and board. Other expenses that do not qualify may include insurance, athletic or club expenses, travel and, that bigee, student loan repayments.


Withdrawals for non-qualified expenses are permitted but they may be subject to taxes and penalties. Exceptions to penalties include receipt of a scholarship. In that case, you are permitted to withdraw an amount equivalent to the scholarship. Income taxes, however, would still be owed on the earnings portion of the withdrawal. 




False. There are a wide variety of state-sponsored 529 Plans and you are not required to use the state plan in which you live. Plans vary greatly so there are many factors to consider including a range of investment options, fees, and potential state-level tax benefits. The facing chart is a summary of state-by-state plans


If you live in a state with 529 tax-benefits but have a 529 Plan through another state plan or no 529 plan at all, there may still be an opportunity to realize tax benefits. Most plans do not have a waiting period on withdrawals. Therefore, a strategy to consider is rolling over an out-of-state plan to the in-state plan to recognize any tax-benefits. Or, you could establish an in-state plan, make a contribution and then withdraw the funds a day later to pay the bursar’s bill. Provided the withdrawal is made to pay for qualified higher education expenses, you may qualify for your state’s income tax deduction. As with any tax strategy, it is important to carefully discuss this with your tax advisor (we also recommend avoiding the term “loophole”).



False. In general, parent-owned 529 Plan assets have a relatively small effect on federal financial aid eligibility. Assets in custodial accounts such as UGMA or UTMA accounts tend to have a greater impact on financial aid packages as they are considered assets of the child versus assets of the parents. 529 Plans owned by grandparents for the benefit of grandchildren present some unique tax hurdles to consider. To allow for proper tax-planning, it is best to speak with your tax advisor well in advance of taking distributions for grandchildren.


With the cost of college skyrocketing, borrowing to pay for some of college is a financial necessity for more and more of us. In this case, you may want to prioritize spending down 529 Plan balances in order to put off, as long as possible, the accumulation of interest charges on student loans.



   • Anyone can open and contribute to a 529 Plan

   • 529 Plans aren’t just for college anymore

   • State income tax credits may be available

   • The IRS is watching - keep good records




Whether you are just starting a family and considering getting started saving for school, you’ve fully funded your kids’ (or grandkids’) education or you plan to pay for school through a mix of savings and student loans, now is the time to coordinate your college savings/spending strategy. A well thought out savings/spending strategy can help you maximize potential tax advantages and, equally important, avoid mistakes along the way. IIII



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