The 529 Plan: A Guide for Parents and Grandparents

The cost of a college education has been rising steadily for decades, and it shows no signs of slowing down. As a result, many parents find themselves struggling to save enough money to cover the cost of their child's education. Fortunately, grandparents often step in to help with this expense. Grandparents are typically in a better financial position than parents and are often willing to help their grandchildren attend the college of their choice. In addition, grandparents can often take advantage of tax breaks that make saving for college more beneficial. As a result, their assistance can be essential in helping families pay for this important investment.

One tool to help save for education that has gained popularity in recent years is the 529 plan. Named after Section 529 of the Internal Revenue Code, a 529 plan is a tax-advantaged savings plan designed to encourage saving for future educational expenses. In this blog post, we will provide an overview of the 529 plan, its benefits, and some things to consider when choosing a plan.

How 529 Plans Work

To begin with, there are two types of 529 plans: prepaid tuition plans and education savings plans. Prepaid tuition plans allow you to purchase credits or units at participating colleges and universities at today's prices. Education savings plans are investment accounts that are sponsored by states or educational institutions. The money in these accounts can be used to pay for qualified educational expenses at any eligible institution, including vocational schools and foreign colleges and universities.

Benefits of the 529 Plan

  • Tax Benefits:

Funds in a 529 account grow tax-deferred and can be withdrawn tax-free as long as they are used for qualified educational expenses. Withdrawals from a 529 for qualified education expenses are not subject to federal taxes (and in some cases, state taxes). You may be able to claim a state tax deduction or credit if your state offers one and you contribute to a plan sponsored by your state. You may also be able to take advantage of other state tax incentives.                             

  • Flexibility:

529 plans are quite flexible. For starters, you can use the funds at any eligible institution, both in and out of the country. Additionally, if your child of grandchild decides not to go to college or completes their degree sooner than expected, you can change the beneficiary to another qualifying family member (including yourself). And if you later decide that you don't want to use the money for education after all, you can withdraw it (although you'll generally have to pay taxes plus a 10% penalty on earnings).

Understanding Your State’s Tax Benefits

When considering a 529 plan, it's important to understand any differences in tax benefits that may be offered by your state. Some states offer additional tax breaks for residents who contribute to their home state's 529 college savings program, while other states do not offer any additional benefits beyond the federal tax breaks discussed above. To find out if your state offers any additional benefits, it's advisable to speak with a wealth professional. Once you know what's available, you can compare different programs to find one that best meets your needs. If you're considering investing in a prepaid tuition program, keep in mind that these programs may only be offered by specific states or schools and may only cover tuition at participating colleges and universities.

Final Thoughts

The 529 plan is a powerful tool that can help you save for your future generation’s education while also providing some valuable tax benefits for parents or grandparents. If you're thinking about setting up a 529 plan, I can help you get started. We have years of experience guiding loving parents and grandparents through the process. Contact us today to learn more about how we can help!


*The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that an education-funding goal will be met. In order to be federally tax-free, earnings must be used to pay for qualified education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10 percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.