Like a zebra’s stripe pattern, no family’s financial goals are identical.

Within wealth management, we see certain recurring goals, one of which is setting children up for success. While every family’s view of achieving that success varies (e.g., helping children buy their first home, passing on family culture and work ethic, helping children grow into financially independent adults, etc.), for many this includes providing financial support for college and possibly graduate school.

With the average cost of tuition and fees, for a 4-year degree, at a private university reaching $38,185 and $10,338 for a public in-state university,1 paying for college for one, let alone multiple children, is a substantial financial undertaking.

While current tuition prices are high, it is unfortunately important to note that the cost of college has been rising dramatically over the last 50 years.2

All this to say, while families would love to assist children (or grandchildren) with education expenses, thoughtful planning is needed, which brings us to the 529 account.

Understanding 529 Accounts

Created by a bipartisan bill in 1996, 529 plans (named after Section 529 of the Internal Revenue Code) are the Swiss army knives of education planning.3

These versatile accounts essentially function like Roth IRAs. The plans are state sponsored and today, 49 states and the District of Columbia sponsor a 529 plan – although you do not have to be a resident of a particular state to participate in their 529 plan.4

Monies are contributed, and all the gains are tax free when the funds are taken out, provided they are used for qualified education expenses (e.g., tuition, room and board, books, and mandatory fees and supplies at a qualifying institution).5 A 529 plan can take the form of an education savings plan where the account owner chooses from a selection of pre-screened investment options or a pre-paid tuition program.6 In addition, funds are not required to be used at an education institution in the state that sponsors the plan.

This innovative program provides a tax-favored way to save for education as well as solve limitations of earlier education savings vehicles. Each account must have:

  • An owner over the age of 18 (usually a parent or grandparent).
  • A beneficiary.

For tax purposes, contributions made to the account are treated as gifts to the beneficiary,7 but since there is also an account owner, it eliminates the concern that a child beneficiary may reach the age of 18 and spend the funds on something other than education.

Although there may only be one beneficiary at a time, the beneficiary may be changed. For example, if a child chooses not to attend college or does not need all the funds put aside for them, those funds may be provided to another beneficiary.8

What Institutions Qualify?
Qualifying institutions include a wide array of schools including community colleges and graduate schools,9 and 529 funds may be used to pay for flight or medical school. 529 plans can also receive contributions from individuals other than the account owners – so if a child’s mother owned the 529 account, the child’s grandfather could make contributions.

Tax Considerations
While 529 plans are powerful tools for saving for education, there are important things to consider prior to funding one.

Since 529 contributions are gifts, it is important to talk to your CPA as you may need to file a gift tax return if your contribution exceeds the annual federal exclusion (check the current laws), currently $16,000 for 2022.

These plans may also be “superfunded.” This allows you to contribute up to five times the annual gift tax exclusion in a single year.10 Again, it is essential to coordinate with your tax advisor prior to “superfunding.”

Also, some states have a limit on 529 contributions, meaning that no additional contributions are allowed once a 529 has reached a specific dollar value. In addition, while 529s work very well for qualified education savings, they are not ideal to over-fund. You will pay income tax and a 10% penalty on the gains of any funds that are not used for qualified education expenses.11 Finally, the SECURE Act allows for up to $10,000 a year to be used for private primary and secondary education.12 Be sure to confirm that your state adopted this change prior to taking a distribution from a 529 plan to pay for private primary or secondary school tuition. Other states also offer state tax incentives for contributions to 529 plans. For example, Oregon offers a state tax credit for contributions to the Oregon College Savings Plan 529 accounts.

Establishing a 529 Plan
A 529 plan is relatively easy to establish.

The first step is determining if you want to use a plan sponsored by your state or another state’s plan. Things to consider may include, whether your state offers a state tax incentive, the investment options available in the plan, and cost.

A financial professional can help you determine which 529 plan is the right fit for you and your family. Once you have selected the 529 plan, you can set up an account online with a nominal initial deposit.

Is a 529 Plan Right for Your Family?
529 plans allow for substantial tax-free growth, flexibility, and control, but education planning goes beyond the simple act of opening the account. Let others know about the 529 account you plan to open or have opened and how they can contribute.

Discuss your expectations for the account and how you would redistribute the funds if a child did not need the funds for education. Sometimes based on the state tax incentives available and your financial goals, it may make sense for other family members to open their own 529 accounts rather than contribute to an existing 529 plan.

Saving for education can be a daunting goal, but a 529 plan may have a place in helping you and your family meet your goals.

Roehl & Yi Investment Advisors can assist you in your financial decision making and help you determine which path may best meet your needs.

Written by: SARAH MELLGREN, JD, CFP®, Roehl & Yi














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