The Value of a 529 Savings Plan: Key Steps and Benefits

A 529 savings plan is a great way to save for your child’s college education. They are tax-advantaged, meaning when money is used for eligible education expenses, you will not pay taxes on any of the money withdrawn. That goes for both contributions and growth. Before we dive into the details – we want to outline the key steps you need to take to add money into your 529 plan, as well as the benefits you and your child will receive from having one.

Contributions to a 529 plan are treated as gifts under federal rules, meaning there is a cap on how much you can give tax-free. This cap is subject to change, so it’s best to check with the IRS to see the current year’s gift-tax cap. For 2022, the annual gift-tax exclusion amount is $15,000. This means you can contribute up to $15,000 per year, per beneficiary to a 529 plan without having to pay any gift taxes. A married couple can contribute $30,000 per year, per beneficiary ($15,000 per spouse).

Another thing to keep in mind is that contributions to a 529 plan are considered taxable income for the beneficiary. So, if you contribute $15,000 to your child’s 529 plan there might be an impactful tax consequence on the gift, especially if they have other earned income. Please work with a CPA to make sure all possible tax consequences are handled appropriately.

You can use the funds in a 529 plan to pay for any qualified education expenses at any eligible college or university. This includes tuition, room and board, books, and even computers and other technology needs. Also, it’s not restricted to only college expenses. Trade school or private elementary/secondary school costs are also eligible expenses.

Additionally, there are no income restrictions or age limits for contributors. Anyone can contribute to a 529 plan, regardless of their income level. Adults can use them for continuing education, undergrad courses or graduate courses offered at an eligible university/school.

If you’re thinking about opening a 529 savings plan, here are a few key steps to take:


  1. Decide who will be the plan’s beneficiary.

    This can be your child, grandchild, or other family member however the beneficiary is not limited to family members. Nor is the number of beneficiaries limited. The only requirement is that the beneficiary must be a US citizen or a resident alien, and must have a social security number or federal tax identification number. You could even name yourself as the beneficiary. Just know that depending on the relationship of the new and previous beneficiaries, changing the beneficiary of an account may trigger a taxable event, which could also include a penalty, gift tax or both.

  2. Choose an account provider.

    There are many different providers out there, so do some research to find the one that best suits your needs.

  3. Determine how much you want to contribute.

    You don’t have to contribute a lot of money each month; any amount will help get your child closer to their college dreams.

  4. Select an investment portfolio.

    This is the part of the plan where you decide how your contributions will be invested. There are many different options to choose from, so you can find one that best matches your risk tolerance and investment goals.

Control of the account remains with the contributor regardless of the age of the beneficiary. Withdrawals from college savings plans can be used at most colleges and universities throughout the country, including graduate schools. Some overseas educational institutions also may be eligible. Many states now offer at least one college savings plan that has no residency restrictions. You can live in Ohio, contribute to a plan in Maine, and send your child to college in California. However, if your state offers state tax advantages to residents who participate in the local plan, you’ll miss out if you opt for another state’s 529 plan. If you plan to use your 529 savings for K-12 tuition and expenses, check with your state to see if it allows a state tax deduction for qualified withdrawals (qualified withdrawals are free from federal taxes for everyone).

Investing in college savings plans does come with some risks. Unlike prepaid tuition plans, they don’t lock in tuition prices. Nor does the state back or guarantee the investments. There also is the risk with most college savings plan investment options that you may lose money, or your investment may not grow enough to pay for college. For example, if you choose a plan option that invests in stock mutual funds, chances are that your invested funds’ annual performance will mirror the stock market trends. Thus, you may lose value during a declining market.

However, a sound risk-management strategy with an advisor will help make sure the assets have the best opportunity for growth while taking on no more risk than is necessary. An advisor can deliver personalized advice on how to best save for college. Saving for the economic success of your children will be a rewarding and promising endeavor when done correctly.