STRATEGIC WEALTH PARTNERS: The Expansion of 529 Plans

Strategic Wealth Partners issued the following announcement on Nov. 1.

What is a 529 Plan?

The Tax Cuts and Jobs Act of 2017 increased the benefits of 529 savings plans, which make them very attractive for parents and grandparents looking to put money away for education. Before I explain the expansion of 529 plans, let me briefly explain what a 529 plan is and why they are so enticing. 529 plans were created in the 1990s and resemble some of the tax advantages of a Roth IRAs. They are designed for secondary education savings and have three significant income tax advantages if used for qualified expenses:

There are state tax deductions or credits for making contributions.

Some states only allow these for state sponsored 529 plans while other states allow them for 529 plans opened in any state.

Money grows tax deferred until withdrawn. But…

Qualified expenses can be paid without paying taxes on the distribution from the account.

There are estate and gift tax benefits as well. Your contributions qualify for the annual gift tax exclusion (Currently $15,000 per account per beneficiary for 2018). Keeping your contributions within the limit will keep you from affecting your lifetime estate and gift tax exclusion. You may also make up to five years of annual gifts in one year! This rule allows you to contribute up to $75,000 of tax-free contributions per beneficiary in a single year.

How does the expansion of 529 plans work?

Up until 2017, you could only utilize 529 plans to pay for secondary education. The Tax Cuts and Jobs Act of 2017 allows 529 plans to now be used for K-12 expenses as well (with a cap of $10k per year, per student for tuition only). If more than $10,000 is utilized for any reason, the excess will be included in the gross income of the contributor. Also, it is important to note that the definition of qualified expenses is broader than tuition if used for secondary education. The type of K-12 school does not make a difference either. It can be a public, religious, or private schooling.

What else should I know about 529 plans?

Student Loans

First off, the balance inside a 529 plan will show on the FAFSA form. This may affect the amount of financial aid available for the student. Cash accumulation life insurance on the other hand does not show up on the FAFSA and tax-free loans can be another way to help with the cost of secondary education. Determining the best vehicle or vehicles for education is a complex subject and I highly recommend discussion this topic with a financial advisor before making any decisions.


Funding 529 accounts for multiple children in the same family can be confusing. Many contributors split their contributions to 529 plans equally between all the beneficiaries (That just seems fair right?). This is not the most efficient way to put your hard-earned dollars to work for the future of your loved ones. It is best to contribute as much as possible to the oldest child/grandchild’s 529 plan. Why? 529 plans are portable between family members (the list of family members is very encompassing) which means you can change the beneficiary with no tax consequences. This way, any left-over funds can be used by the younger family members which helps you combat some of the unknowns such as a beneficiary receiving a scholarship. You never want to over-fund a 529 plan either because non-qualified usage of 529 funds are taxable and will incur a 10% penalty.

The rules of 529 plans vary state by state, so you want to make sure to consult a financial advisor before taking the general information I have provided today as financial advice. If you have any questions regarding this topic, feel free to reach out to me.

Original source can be found here.

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