Sherpa Wealth Strategies Financial Planner in Bend, Oregon

The ABC’s of 529 College Savings Plans

Brian Stallcop

The ABCs of 529 Plans

May 29 is 529 day! 529 college savings plans are the most popular way to set aside money for college tuition. So what is a 529 and how does it work?

A 529 plan allows folks – parents, grandparents, family friends – to save and invest money to pay for education. And it’s not limited to four-year colleges. You can use a 529 plan for community college or trade school. And since 2018, 529 accounts can be used to pay up to $10,000 per year in tuition for K-12 students attending a private, public or religious school.

Owners and beneficiaries

Each account has one owner – usually a parent – and a single beneficiary. If you have more than one child, you’ll need to set up a separate account for each one. You may change the beneficiary at any time. We had one client who changed the beneficiary on her son’s 529 plan to herself so she could get her master’s degree. She changed it back when she finished her studies. We had another client whose child joined the Marines and got the GI Bill for college. The family changed the beneficiary on his plan to his sister, who used the funds to attend graduate school. You can also change the beneficiary down the line to a grandchild.

Income tax benefits

On the federal level, there’s no tax deduction for contributions, but the investments grow tax-deferred and withdrawals for “qualified higher education expenses” are tax-free. If you start early, you can get up to 18 years of tax-free growth!

Many states offer tax benefits for contributing to a 529 plan. Since every state has a different tax system, nearly every state has its own 529 plan. (Some state like Washington, which has no income tax, do not have a 529 plan.) In our home state of Oregon, taxpayers can receive an annual tax credit worth up $150 for single filers and $300 for joint filers. Other states give a tax credit or deduction for state residents who contribute to their in-state plans.

Federal gift and estate tax benefits

Contributions may qualify for an annual federal gift tax exclusion of $15,000 per donor ($30,000 for married couples). One interesting wrinkle is that you can contribute a large lump sum and have it count toward the gifting limit for up to five years going forward. For example, you could contribute $75,000 ($150,000 for couples). As long as you don’t make further gifts over the next five years you’re golden.


Though most states have their own plan, the money is portable. An Idaho resident can contribute to the Virginia plan and send their child to college in Texas.

What expenses qualify?

A qualified higher education expense is basically anything you can get federal financial aid for – tuition, room, board and necessary supplies. Travel expenses to and from school are not a qualified expense, but we’ve had plenty of students use 529 money for laptop computers, musical instruments for music majors and stethoscopes for nursing majors. You can also use a 529 for some international programs – especially study-abroad programs sponsored through a university in the United States.

And you can now use 529 funds for up to $10,000 in K-12 tuition per child, per year.

When not to contribute to a 529 plan

It doesn’t always make sense to contribute to a 529 account when the kids are close to college or already enrolled. The same applies to K-12 education. If the money has no time to grow you won’t realize the benefits. You may get a state income tax break but that could be offset by investment fees.

However, grandparents or other donors can get around the federal gifting limits by writing a check directly to the educational institution.

Advisor-sold plans vs. direct-to-consumer plans

Like anything else in life, you can do it yourself or hire an expert. Some like to go to Home Depot and others like to hire a plumber. Most states have a direct-to-consumer plan and an advisor-sold plan. The direct-to-consumer plans usually have lower expenses. They may have fewer investment options. The advisor sold plans will include some sort of compensation for the advisor, either in the form of an up-front sales commission or ongoing servicing fees. According to, there are four reasons people decide to open a plan through an advisor:

  1. You need help selecting from the more than 100 available options
  2. You already work with a financial advisor or financial planner who understands you complete financial picture.
  3. You may be able to get discounted or even waived commissions depending on how your other assets are invested.
  4. You are looking for active investment management.

What if my child never goes to college or there’s money left over?

As previously noted, you can change the beneficiary at any time to any other person, including yourself. And though a child might not attend college at 18, they may have a different life plan at age 26. Be patient.

What if I spend the money on something else, like a house or a car?

The earnings portion of a non-qualified withdrawal will be subject to income taxes and a 10% penalty. There are a few exceptions. You should consult with your tax advisor and financial advisor before making such a move.

Need help with your child’s 529 plan?

Planning for your child’s education may be one of the largest investments you ever make. If you’re looking to make the most out of your college savings plan, send us an email or give us a call. We’re happy to help.

Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in
such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.


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