5 Things to Know About a 529 Plan

Whether a child is 8 or 18 years old, you and your clients should financially prepare for his or her college education. Many clients have questions and concerns about 529 plans, especially if college may not be an immediate priority. Here are some common questions and answers to help guide the conversation toward savings success.

  1. We are expecting a baby. Is it too early to start a 529? No way! With college costs continually rising, you will need as many resources as possible to pay for your child’s higher education. The power of compounding means that the earlier you open the 529 account, the more your family could potentially benefit. Put whatever you can into the plan, and then go paint the nursery.
  1. I’m not sure if my child will go to college. What will happen if he or she doesn’t use the money in the plan? There are several ways to use the funds in a 529 plan without funding an education for the original beneficiary.
  1. The funds can be transferred to anyone related to the original beneficiary.
  2. The funds can be removed for purposes other than education, but will be subject to a 10% penalty as well as income tax on the earnings.

You can also refer to this article1 for more information.

  1. Can we use the funds for expenses other than tuition and fees? You can pay for several expenses beyond tuition and fees with funds from a 529, as you will find listed here2. If your student receives a scholarship, the amount of the scholarship can be removed from the 529 and used for non-qualifying expenses without incurring the 10% penalty (earnings would still be subject to income tax).
  1. Do I need to be able to fully fund the 529? No! Put in as much as you can. Again, the power of compounding can potentially affect the balance, so start as soon as you can.
  1. Is this the only way to pay for college? Absolutely not. A 529 is a great way to get started saving for college, and to benefit from growth over time. However, thousands of scholarships, grants, and interest-free loans may become available when your child begins applying to colleges.

The Internal Revenue Service provides guidance on 529 Plans in their Q&A3. We recommend seeking the counsel of a tax advisor as tax laws change over time and may differ by residency and other factors.

Note: The information contained in this blog does not constitute tax advice and is provided for informational purposes only. Clients and financial advisors should consult their tax advisor, local taxing authority, and/or plan provider or sponsor for more information.


1 https://www.usnews.com/education/best-colleges/paying-for-college/articles/2014/07/09/beware-of-5-myths-about-changing-a-529-plan-beneficiary

2 https://www.forbes.com/sites/brianboswell/2016/10/02/what-can-you-spend-your-529-savings-on/#17aa0724c3cd  

3 https://www.irs.gov/uac/529-plans-questions-and-answers


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