Top 5 Questions Parents Ask About Using Their College 529 Plans


A 529 college savings plan is a great way to save money for college and offer years of tax-deferred growth and tax-free withdrawals when the money is used for qualified education expenses. It’s also flexible, so if your child decides to change their plan, or you want to switch to a different state plan, or you have more funds left over than originally anticipated, there are options available to make the best of your funds. Here are five frequent questions parents ask about maximizing 529 plan benefits.

Top 5 Questions Parents Ask About Using Their College 529 Plans

Setting up 529 college savings plans for your children or grandchildren is a smart move that can potentially save you thousands of dollars in taxes and soothe some of the anxiety about how to pay for college.

In almost three decades as a practicing CERTIFIED FINANCIAL PLANNER™ professional, I’ve helped many parents establish 529 plans for their children. In fact, I started 529 plans for my own kids almost 20 years ago. My daughter graduated with an engineering degree (with a few dollars left in her 529 plan!) while my son is still using his account to train as a commercial pilot. Years of tax-free growth inside their 529 accounts made our savings stretch, and it taught my kids important lessons about investing and planning.

In a recent article, we shared with you five tips for getting the most out of your college 529 plans. Here are five more questions parents ask about maximizing 529 plan benefits, including how to switch to another state’s plan, how to protect your 529 savings if something happens to you, and what to do if there is money left in your plan after graduation.

Question #1: How to switch to another state’s 529 plan?

There are many reasons you might want to switch 529 plans. I did so years ago, moving my kids’ plans to another state in search of lower management fees and better online savings tools offered by the new plan. Another popular reason to consider changing 529 plans is when parents move to another state and want to take advantage of the new state’s tax incentives.

If you decide to switch plans, you can move assets from one state’s 529 plan by doing what is called a rollover. There are a few important IRS rules to be aware of:

  • You may roll funds over only once every 12 months for the same beneficiary.
  • You may roll funds over to another 529 plan at any time for a different beneficiary, as long as the beneficiary is a family member (see plan definitions for who qualifies).
  • It’s always better to roll 529 funds directly between plans without you ever receiving a check. But if you do receive a check for the plan proceeds, you must roll funds over and deposit them to another 529 within 60 calendar days to be considered an allowable rollover without tax consequences.

When I rolled over my children’s 529 accounts, I first opened new 529 accounts for them with the new plan. Then, I completed the form authorizing the new plan to collect the existing 529 plan assets and roll them into the new state’s accounts. The new plan administrator took care of all the arrangements for me, and almost magically, the money appeared in the new accounts, without me having to make any additional phone calls or fill out more paperwork.

Insider advice: If you decide to switch plans, make sure to ask the new plan administrator to roll over the funds directly without you ever receiving a check. This avoids tax complications. As mentioned, rollovers are restricted to once per 12-month period. Good reasons to switch plans? Relocation to another state, lower fees, or access to a unique investment option that’s not available at your current plan.

Question #2: Can 529 plan funds be used for international study programs?

COVID-19 may have put a temporary dent in the popularity of international study abroad programs, but when things get back to normal, your college student may want to spend time at a university in Australia, Europe, or elsewhere.

Fortunately, your 529 plan can facilitate that trip Down Under or wherever else their studies may take them. College 529 funds can be used to pay for tuition, fees, books, supplies, and other qualified educational expenses without tax penalty at many higher education institutions outside the United States. Even if your student simply intends to study abroad for a semester or two, your 529 plan can cover these expenses if:

  • The study abroad program is eligible for credit at your student’s U.S. educational institution and
  • Your student’s college or university is eligible under the Department of Education guidelines.

Insider advice: There’s an easy way to find out which foreign colleges and universities are eligible. Simply visit the U.S. Department of Education’s federal student aid website, click on the Federal School Code List, and sort using the Country column at the far right. Last I looked, there were almost 400 foreign universities on the list, including one where I studied years ago in Paris. Time to go back for a refresher course!

Question #3: How can I supercharge my annual gifting?

You may already know that contributions to a 529 plan are treated very favorably for estate and gift tax purposes. The funds you put into a 529 plan are considered gifts and effectively removed from your taxable estate. Parents or grandparents (or anyone really) can give up to $15,000 (note: raised to $18,000 in 2024) per person per year without having to report the gift for tax purposes. This $15,000 contribution amount (which remains the same for 2021) also doesn’t count toward your lifetime exemption amount.

Here’s the icing on the cake. On top of those tax benefits, you can “supercharge” your gift to a 529 plan by making up to five years of gifts without incurring the gift tax. The gift is made in a single year but is averaged over five years. This means you can contribute $15,000 five times (or $75,000) at one time (raised to $90,000 in 2024). If you are married, your spouse could gift an additional $75,000, for a total contribution of $150,000 ($180,000 in 20240 per beneficiary. (Use IRS Form 709 to elect treatment of the entire gift as a series of five equal annual gifts).

Insider advice: This is a great technique to consider if you just sold a business, received an inheritance, or had some other cash windfall, as it lets you instantly channel five years of funding into a 529 plan. It works equally well for grandparents wanting to leave an educational legacy for younger generations. You need not be the 529 account owner to make the gift. Gifts to 529 plan accounts are extra powerful because the funds can grow tax-free and typically be withdrawn tax-free to pay for qualified higher education expenses.

Question #4: What happens to the money in my 529 account if something happens to me?

College 529 plans have only one owner and one beneficiary at any given moment. The account owner is often a parent or grandparent, and makes all key decisions, such as naming the beneficiary, choosing the investment strategy, and requesting withdrawals. The beneficiary is the student, who uses the funds for his or her education but has no control over the account.

If the account owner dies or becomes incapacitated and there are still funds in the 529 account, the terms of the plan determine who becomes the new account owner. With most plans, the account owner has the right to name a successor. In fact, many plans allow you to name a primary and a secondary successor to take over in the event of your death, disability or voluntarily resignation.

If you do not name a successor, the rules of your specific college savings plan will determine what happens to the plan at the time of your death or disability. In some states, ownership passes at your death to the designated beneficiary, with special rules that apply if the beneficiary is still a minor. In others, your 529 account passes through probate to be distributed according to the terms of your will or your state’s intestacy laws if there is no will. For example, Utah’s 529 plan, which is one of the most popular plans available, includes terms that dictate that 529 plan ownership passes to the successor owner in the event the original owner dies. If there is no named successor, ownership passes to the beneficiary. If the beneficiary is a minor, the minor’s guardian takes over as custodian. If the owner becomes incapacitated, the plan owner can have an attorney step in to administer the account with a valid durable power of attorney (POA).

Insider Advice: To protect your 529 plan investment, you should always name a successor account owner if the plan permits. Also, check with your attorney or advisor to make sure your durable POA addresses who can handle your 529 plan in the event of your incapacity.

Question #5: What can we do with money left in our 529 plan?

Ending up with extra money in your 529 plan is not a bad problem to have. It’s much better than running out of money too early! An estimated 10% of families end up with money left in their 529 plan.

Here are a few ways you can use the money:

  • Transfer the funds to another family member’s plan—that could mean a brother or sister, a niece or nephew, a future grandchild, or even yourself. Your plan documents will spell out the acceptable family members.
  • Leave the money in the plan in case it’s needed for grad school or an eligible professional program. For example, one of our clients has a considerable sum of money left in the California ScholarShare 529 plan. His son is in the military and hasn’t needed the funds so far. With the California 529 plan, there’s no age limit for using the money, so for now, the parents are leaving all the funds in the plan to continue growing tax-free.
  • Withdraw up to $10,000 per beneficiary tax-free to pay down a qualified student loan. An additional $10,000 is available for a sibling. This was a new provision in the recently passed SECURE Act. But before you do so, talk with your financial or tax advisor. While my home state of Florida has no state income taxes to complicate things, other states’ rules haven’t kept up with the new SECURE Act changes, and that federally “tax-free” $10,000 withdrawal could set off tax alarm bells on your state return.
  • Let the beneficiary withdraw funds for non-qualified expenses, like a down payment on a new home. Yes, non-qualified distributions like this will be taxed to the extent of earnings and slapped with a 10% penalty, but the beneficiary may be in a low enough tax bracket that the tax hit will be minimal. (Remember that withdrawing your contributions is always tax-free). Ask your tax advisor to estimate the tax bill before making the withdrawal. The 10% penalty – but not the taxes – will be waived if you withdraw funds due to the beneficiary’s death or disability, if your student receives a scholarship to pay for school, enroll in a U.S. military academy, or a few other circumstances.
  • New in 2024! Rollovers to Roth IRA accounts. Check our blog for more details.

The good thing is that 529 plans are incredibly versatile and flexible financial tools, so the money you save now can continue to grow until your student is ready to use it. Talk to your advisor about how you can use a 529 plan to help set up your kids and other family members for success.

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