Education planning: 529 plans – Know the choices and the rules


While we all have uncertainties about schools reopening amidst a global pandemic, we are certain meeting the costs of education, particularly college, will require some financial wherewithal. 

To help save for future education expenses, one option to consider is using a qualified education savings program offered by many states.  These programs, commonly known as 529 plans, differ among the states and savers can invest in a 529 plan offered in a state different from where they live.  In all cases, they are offered by the state’s government and allow for tax-free earnings on the investments over time and tax-free withdrawals as long as the money is used for qualified education expenses.  States may also offer tax advantages to using your own state’s plan.  For example, Illinois, New York and Wisconsin (as well as others) provide a state income tax deduction for contributions made to their 529 plan by residents.

Currently the following education expenses qualify for tax-free payments from 529 plans:

  • Tuition, fees, books, supplies and equipment required for enrollment or attendance at an eligible higher education institution
  • Certain apprenticeship program expenses
  • $10,000 or less paid as principal or interest on a qualified student loan of the designated beneficiary or the designated beneficiary’s sibling
  • No more than $10,000 annually for elementary (K-12) education expenses per beneficiary

Withdrawals from 529 plans for purposes other than these qualified education expenses incur ordinary income tax, a 10% penalty and possible recapture of a state income tax deduction so plan wisely!

Funding 529 plans is generally done by making regular cash contributions over time.  Accounts may also be “super funded” with an initial cash contribution equal to 5 years’ worth of annual exclusion gifts.  In 2020, this combined up-front contribution may be $75,000, or $150,000 for a married couple.  Funding a 529 plan may only be done with cash.

Each account has one beneficiary at a time and the beneficiary may be changed to another qualified family member (including immediate and extended family). 

There are two methods available to access 529 plans. 

Which method you choose can depend upon your preference for having guidance along the way, particularly with selecting the plan and the investments best suited to your needs. 

  • Direct-sold plans:  Contact the state plans directly to learn the process, establish an account and select investment options.
  • Advisor-sold plans: Facilitated by a licensed financial advisor who works for a registered investment advisor or broker-dealer.

Here are a few examples of 529 plans:

For more information, visit the plan's website. By clicking the link's above you will be leaving the Kovitz website. We do not endorse these programs or information you may view on other sites.

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