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Oct 16, 2019

529 Plans: Understanding the Changes to Education Savings

William Velekei, CPA, CFPBy William K. Velekei, CPA, CFP


MoneyLife100The value of an education is infinite. Sometimes the price tag can feel the same way.

Education is expensive, both for primary and secondary schooling, but there are tools available to help you lessen the burden. College savings 529 plans have been regarded as a primary savings vehicle over the past decade, with good reason. The plans allow for tax-deferred growth on invested principal, much like how an individual retirement account (IRA) works as a retirement savings vehicle. Unlike an IRA, though, funds are distributed tax-free for qualified education expenses, as defined by regulations.

Happy graduation pictureThere are additional features of 529 plans that are lesser known, and education savers should take note as some may pertain to their circumstances.

K-12 Education Expenses

The Tax Cuts and Jobs Act (TCJA), which became effective in 2018, expanded what was deemed eligible education costs that can be paid from a 529 plan. Prior to the TCJA, only college education costs qualified for distribution without any tax or penalty implications. Now, 529 plans also can be used to fund kindergarten through 12th grade schooling costs, including private school tuition.

Investors should be aware that, while federally authorized, each state has autonomy to administer its own 529 plan, producing variances from state to state. Primary school costs are able to be distributed and funded by a 529 plan up to $10,000, per year, per beneficiary, without any tax implications -- a limit imposed at the federal level.

State Deductions and Benefits

Some may question the cost-to-benefit of making a 529 plan contribution that will be distributed right away for primary school expenses. After all, a primary benefit of a 529 plan is the tax-deferred growth of investment over time.

However, there is some benefit to executing such a strategy on an annual basis, depending on the state in which you reside. Most states have some form of a tax break or credit for contributions that taxpayers make to a 529 plan. Pennsylvania, specifically, is one of the most tax-friendly states with regard to 529 plans. The state offers what is deemed “parity,” which means a Pennsylvania taxpayer can open a 529 plan in any state, and contributions to it will still count toward a deduction on Pennsylvania state income tax. While breaks are typically capped at a certain level, it may be worth considering if you can save a few hundred to a few thousand dollars in state taxes. Your CPA or financial adviser should be consulted for more information on the state tax benefits specific to your situation.

Ownership and Contributions

Typically, parents are the owners of a 529 plan for their child and the child is deemed the beneficiary. There is nothing wrong with this conventional approach, but one may consider having grandparents become the owner of a portion of 529 plan funds. The ownership between parents and grandparents could benefit student financial aid calculations, which should be taken into consideration.

There is no generic answer for how much families should be contributing to a 529 plan. Variables such as investment return and college costs can be projected, but the family’s goals and objectives, which are more subjective, are equally important. One feature of 529 plans that should not be forgotten is what I will refer to as front-loading. In 2019, a married couple would be able to contribute $150,000 in a single year to a beneficiary without any gift tax implications. This could be useful in making one early lump sum contribution for education savings or making a catch-up contribution as a beneficiary nears the appropriate age for education.

The benefits and value of 529 plans are known and used by many, but there are tax and funding strategies around these instruments that are more obscure and complicated. Whether you are currently contributing to a plan for education savings or thinking of establishing one, consulting with your CPA is highly recommended to maximize the benefits.


William Velekei, CPA, CFP, is a wealth adviser for Corbenic Partners LLC, a registered investment adviser, that works with high net worth individuals and families, based in Bethlehem, Pa.


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