See how to use a 529 plan as an efficient way to save for education and a powerful estate planning strategy.
Investing for life events

Planning to open a 529 plan account for someone you love? It’s a smart move for education—and for your estate.

See how to use a 529 plan as an efficient way to save for education and a powerful estate planning strategy.
7 minute read
September 30, 2019
Investing for life events
529 Pre-paid college savings plans
Education savings
Estate planning

As tuitions increase, many family members and friends are lending a hand to help with the costs. They know that contributing to education can have a long-lasting impact on current and future students. And more and more they’re also discovering that a 529 savings plan can offer benefits that stretch well beyond educational goals.

The 529 triple threat

A 529 savings account is certainly a meaningful gift for the recipient, and it can help the gift giver too. By contributing to a 529 account, you can:

  • Give a loved one the chance for a brighter future.
  • Take advantage of special tax breaks.
  • Gain the use of a powerful estate planning strategy.

The obvious 529 advantage

First and foremost, 529 accounts let you play an active role in the education of someone you love. You can feel confident you’re making a difference in the life of perhaps a future teacher, writer, financial advisor, or—who knows?—maybe even a U.S. President. That’s a huge reward in itself.

529 tax benefits up front

Tax benefits are another double-duty advantage because they can benefit both students and investors. The real power behind a 529 comes from the tax-deferred growth and tax-free withdrawals it can provide. The earnings generated in a 529 plan aren’t subject to federal income taxes, allowing the investments to grow without being depleted by a heavy tax bite. This means more of your money is left in the account to grow and compound, increasing the amount that can help pay for education. Additionally, when the savings are used for qualified education expenses, the distributions won’t be subject to federal or state income taxes either.* That means you can withdraw the money to pay bills for college expenses such as school fees, tuition costs, books, some room and board expenses, and certain technology costs too—all tax-free.

529s as an estate planning strategy

If you’re in a position to help save for a loved one’s education without jeopardizing your own goals, you could find it beneficial to include 529 plans within your estate plan. Their investment flexibility and high maximum contribution limit can significantly reduce your taxable estate, minimize your tax liability, and preserve more of your estate assets for your beneficiaries. Under the federal gift tax rules, a 529 contribution is treated as a completed gift from donor to beneficiary, and, as such, it qualifies for the annual federal gift tax exclusion. That means you can gift $15,000 per child per year and pay no gift tax. (Married couples filing jointly can contribute $15,000 each, passing on $30,000 to one recipient each year.) The rules also let you opt to “front load” by making a lump-sum contribution. In other words, you can contribute up to 5 times the annual gift contribution (or $75,000—$150,000 if filing jointly) to one recipient as long as you designate this as a 5-year contribution on your federal tax return and you don’t make another contribution to the same person for the next 5 years. Of course, after the 5-year period is over, you can elect to give another lump sum. Meanwhile, the investments have time to grow and compound, tax-deferred. The wealth transfer potential for a move like this can be significant. Just think if you have 4 grandchildren and contribute to 4 separate 529 plans, you could immediately reduce your taxable estate by $300,000.** And 5 years later, you could do it all over again. And, depending on where you live, you may be able to enjoy an added tax bonus, because several states let you use your 529 contributions (up to a certain limit) as state tax deductions, no matter what plan you invest in.†

More to keep in mind

When you’re the 529 account owner, you’re in control, so you can: 

  • Make sure the money will be used exclusively for education expenses.
  • Take the money back. If you find your circumstances change, and you need the money for other purposes, you can withdraw it from the account. However, you’ll have to pay any income taxes owed and a 10% penalty on the earnings (but not the contributions).
  • Change the beneficiary. If one 529 recipient no longer needs the money for education, the savings can transfer to another member of the beneficiary’s family.
  • Control the investment strategy. Most 529 plans allow you to choose from a variety of portfolios that have stock, bond, and international exposure, so you can give your money greater opportunity to grow.

Here’s another good thing about 529 accounts: They never expire. So if your 529 beneficiary decides against college or perhaps wins a full scholarship, and you don’t have another immediate recipient, you can leave the money in your account and allow it to grow and compound for a future grandchild.†† Or you could even designate yourself as a beneficiary and use the money for your own education or retraining! Sign up to learn new technology, or enroll in those special art courses you’ve been passing up. In Italy, perhaps?

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*Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes.

**Please note that there are contribution limits per beneficiary that vary by state. Make sure you consider your contributions as well as the beneficiary’s balance and future contributions of others before contributing. Once a limit is reached, contributions will not be accepted.

†The availability of tax or other benefits may be contingent on meeting other requirements. We recommend that you refer to your state’s deduction limit or consult with a tax advisor.

††Gift or generation-skipping transfer taxes may apply. Consult with a tax advisor for further information.