A 529 savings plan is a tax advantaged account used to pay college expenses.
Deposits are typically invested in mutual funds or money market instruments, shifting
toward more conservative choices as the beneficiary nears college age.

You may be considering a 529 for your child or grandchild. Here are some of the more
common questions we hear from our clients regarding 529 plans.

1. What are the tax advantages of 529 plans?

Earnings in 529 plans are not subject to federal tax, and can provide additional state tax benefits, provided withdrawals are used to pay eligible college expenses.

2. What expenses can I pay with a 529?

Qualified expenses include: Tuition, room and board (subject to limits set by the college), mandatory fees, plus any required material for classes, such as books or computers. Starting in 2018, some state 529s may also allow you to use up to $10,000 per year on K-12 tuition. Remember to keep receipts to document that the funds were spent on qualified expenses.

3. I live in Washington State, which doesn’t have a state income tax. Does Washington offer a 529 savings plan?

Yes, Washington State now offers two 529 plans. Washington State offers a 529 tuition plan, called Guaranteed Education Tuition (GET), which allows you to prepay for college by purchasing units that are tied to in-state tuition costs. Washington also offers the DreamAhead College Investment Plan which allows you to save and invest in the stock and bond market. You can still choose from more than 100 529 savings plans from other states as well. College Savings Plan Network has more information.

4. Are 529 investments guaranteed or insured by the state or federal government?

Most 529s are not guaranteed or backed by the government. Investments carry market risks, and plans typically charge management fees. Note: Washington’s GET program is backed by the full faith and credit of the State.

5. What happens if I withdraw funds to pay for something besides education?

Typically you would pay income tax and a 10 percent federal tax penalty on plan earnings.

6. Can 529s be used to pay for study abroad?

Typically, yes. A complete list of eligible colleges and universities can be found here: http://www.savingforcollege.com/eligible_institutions/.

7. Does it matter who is named as the account owner?

Typically, the person establishing the account is listed as the owner, who then receives account statements and manages the investments. Withdrawals will be reported on the owner’s tax return. However, anyone can make contributions to the account.

It is important to note that ownership of the account will impact financial aid calculations under the FAFSA process, which determines a family’s ability to pay for college before receiving any awards. Under FAFSA, a family is expected to contribute 5.64 percent of assets owned by parents, while assets owned by grandparents are counted as student income and assessed at close to 50 percent. It may be possible to avoid the higher assessment by switching ownership from the grandparents to the parents before withdrawals begin. Be sure to check your plan’s rules before opening the account.

8. Can I change the name of the beneficiary on my 529 plan?

Yes. Most plans allow transfers to a “member of the family”. For instance, if a couple’s oldest offspring receives a scholarship, they could reassign funds to nearly anyone else related to the child, such as siblings, parents, grandparents, first cousins, aunts, and uncles.

9. What happens to the 529 account if my child gets a scholarship?

If you don’t have another college student to support, you can spend the money on postgraduate education. You can also use the account to pay expenses not covered by the scholarship, such as books and supplies. If you still have leftover funds, you can make withdrawals up to the amount of the scholarship without penalties, though you will have to pay tax on any investment gains.

10. Is there a limit to how much I can contribute to a 529?

Yes, the limit varies by state and can range from around $200,000 to $500,000. In addition, we typically recommend spreading plan contributions over several years to stay within the annual tax-free gifting limits. An individual can currently gift up to $15,000 per year per child and a married couple can gift up to $30,000 per year per child without having to file a gift tax return. Note: 529 plans do allow a special one-time contribution worth up to five years of annual gifts. This would require filing a gift tax return, but no gift tax would be incurred.

11. What other strategies are available if I am concerned about overfunding a 529 account?

Continue to save and invest within your own taxable account. Consider gifting appreciated securities to your adult children who are attending graduate school. If they are in a low tax bracket, they may be able to sell the stock without paying capital gains tax.

As with any investment, it’s important to consider how a 529 savings account and other education funding strategies fit in with your broader financial and tax planning. If you’d like to discuss your options for education funding, your Paracle advisor can help you get started.

Disclaimer: This article has been provided for informational purposes only and should not be considered as investment advice or as a recommendation. This material provides general information only. Paracle Advisors does not offer legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, this notice is to inform you that any tax advice included in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of avoiding any federal tax penalty or promoting, marketing, or recommending to another party any transaction or matter.