529 Plan FAQs

Education, Taxes, Wealth Management May 17, 2018

529 Plan FAQs

What is a 529 plan?

A plan administered by a state or organization that offers a tax advantaged way to save for education expenses.

Who can set up a 529 plan?

There are no income restrictions so anyone can set up a 529 plan.  You can also name anyone as the beneficiary.

Why should I use a 529 plan?

Distributions from 529 plans are federal and state income tax-free if used for a qualified education expense. Some states offer tax deductions for contributions, although California does not.

What is a qualified education expense?

Qualified expenses include tuition and fees, books, supplies, and equipment. This includes the cost of computer technology, related equipment and/or related services such as Internet access.

Can I pay for elementary school tuition?

The new tax code expanded the use of 529 plans to include up to $10,000 for tuition for elementary or secondary public, private or religious schools.

Is there an annual contribution limit?

The IRS does not specify a specific limit that can be contributed to a 529 in a year but contributions in excess of the annual gift tax exclusion ($15,000 in 2018) will be considered gifts. You are able to make a 5-year election in which you can contribute up to $75,000 per person or $150,000 per couple to a 529 plan and spread it out over a 5 year period.

Is there a limit on the plan total value?

Yes, the plan total value cannot exceed the amount necessary to provide for qualified education expenses of the beneficiary. Each plan has a different limit based on what the state believes it will cost for qualified expenses. This ranges from $235,000-$520,000. California’s 529 plan has a maximum account balance of $475,000.

Can I change the beneficiary?

Yes, and there are no tax consequences to change the beneficiary to another family member.

Do I have to use the 529 plan offered by my state?

No, you may use 529 plans offered by other states. It is important to look at fees and available investment options when selecting a 529 plan.

Does a 529 plan affect financial aid?

Yes, but the extent is dependent on who owns the plan. If a parent owns a 529 plan, it is considered a parental asset on the Free Application for Federal Student Aid (FAFSA). Depending on the parent’s age, around $20,000 is under the Asset Protection Allowance. A balance beyond this will reduce a student’s financial aid by 5.64%. This is a small loss compared to a custodial account which is considered a student asset reducing aid by 20%.

If a grandparent owns the plan, the assets will have no effect on FAFSA. However, a distribution used to pay for college expenses will be counted as untaxed income which will be assessed at 50%. There are strategies to avoid this by timing the gifts properly and/or rolling the plan balance to a parent’s plan.


Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Roberts Investment Advisors, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.

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