Saving for College: The Guide to 529 Plans for 2018

A 529 plan can be a powerful tool to help fund a family’s education goals for their children. These plans have excellent value, and with the new changes made to them under the 2017 Tax Cuts and Jobs Act (TCJA), families have greater flexibility in funding their educational savings need.


This guide goes into the nuts and bolts of 529s, including their benefits, limitations, and variety. Ready? Lets dive into the details.


What is a 529 Plan?

A 529 plan is a tax-advantaged savings plan specifically designed to fund qualified educational expenses. These plans are usually sponsored by the states themselves, but they can also be operated by individual educational institutions.

With a 529 plan, anybody can contribute funds, and those funds can later be used to pay for the education-related expenses of the named beneficiary. These expenses can be extended beyond tuition to include items such as books and class supplies, room and board, off-campus housing up to room and board limits set by the education institution, technology expenses such as computers, tablets, printers and software, to name a few. You may also change the beneficiary, but more on that later.

For illustrative purposes, let’s take for example you and your spouse have two children, Sophia and Noah. Under current law, in 2018, you are allowed to contribute $15,000 a child per year. That means you can gift $15,000 to Sophia’s account and $15,000 to Noah’s account. Your spouse can also do the same. In total, that’s $30,000 per year to each child’s account.

Let’s also assume your parents would like to contribute to Sophia and Noah’s college education as well. They, too, are allowed to contribute $15,000 each, for a total of $30,000 to each child’s account per year. This is done without needing to open multiple 529 plans. In fact, anybody can contribute to Sophia and Noah’s 529 plans; there is no mandatory relationship requirement for contributors.

The law also allows for what is known as “superfunding.” Under this method, you can contribute 5 years’ worth of gifts in the first year. In 2018, that’s $75,000 per child or $150,000 per couple. This allows the funds to grow in year one, using the power of compounding to your advantage. By employing this approach, using a 5% return, superfunding $75,000 at the beneficiary’s birth is worth $8,279 more over 5 years than contributing the annual limit of $15,000 each year. In both scenarios, you’ve funded $75,000 into the account, but the timing of those funds is drastically different.


superfunding graph.png

As you’ll notice in the graph, over 18 years, you can see how this approach adds up.

If you can’t afford to superfund $75,000 right now, don’t fret. This isn’t an all-or-nothing approach. You can gift anywhere between the individual limit of $15,000 and superfund limit of $75,000. If you elect this method, have a conversation with your tax professional as this should be reported on your tax return at the end of the year.


Plan for the Higher Cost

When it comes to college funding, we recommend you plan conservatively. Understand the entire cost, even if you only fund part of the need. There is often no shortage of college expenses when the time arrives.

For example, when faced with two options, a state school or private school, base your calculation on the higher cost and be sure you know the all-in cost. Don’t be surprised to find that the all-in cost of a school rises 30% or more above the tuition cost alone when factoring in room and board. (All of this information can also help you if you decide to take out student loans and need to understand your loan interest.)

Understand, too, how 529 plans will likely interact with federal loan eligibility. This “equation” examines what financial resources are available and thus what financial aid is offered by the school. In most cases, by simply re-titling the 529 with the parent as “owner” (not beneficiary), as opposed to the student or the grandparent, you can potentially avoid leaving financial aid on the table. 


Eligible Schools

How can you tell whether a school is an “eligible” educational institution for 529 distributions? Within the US, a good litmus test for a school’s eligibility is whether or not students can receive federal financial aid while attending that institution. By piggybacking on the Department of Education’s standard, the IRS can clearly draw a line in the sand. Most schools qualify, but it doesn’t hurt to check. For more information, go to, and navigate to the “Federal School Code Search.” For those attending abroad, select “Foreign Country” in the state field.


Changing the Beneficiary


It’s tough to forecast where little Noah will go to college, or what he’ll study. If Noah doesn’t end up using all of the funds, the plan can be rolled over to Sophia for her ultimate use and benefit. Each plan has a single, established beneficiary. To avoid running afoul of the tax law and incurring unwanted penalty, the IRS provides a detailed list of who’s “eligible” to be named as the beneficiary. Rest assured that intermediate family members are considered eligible.

There isn’t an age cap or limit on who can use the money. You’re within your right if both Noah and Sophia have graduated college and have no further use for the funds to transfer the remaining balance for your own benefit. The same standard—qualified education expenses—applies. In these instances, be sure to grab your passport and sign up for culinary classes in France. 

In the absolute worst case scenario where you have to make non-qualified withdrawals, you’ll incur a 10% penalty plus pay ordinary income tax on any earnings. In other words, you won’t be taxed and penalized on the money you put in, but rather the earnings that grew tax-deferred. While never ideal, it is an option.


Paying Directly to the Institution

Interestingly (at least to us), the tax law also allows for individuals to pay tuition directly to the educational institution gift-tax free (separate from income tax).

But when would it make sense to simply pay directly to the educational institution? Generally speaking, if Noah were a junior in high school with no plans of graduate school, it might not make sense to open and fund a 529 but rather pay his tuition directly to the educational institution. You wouldn’t be wrong for opening a 529 plan, but the tax-deferral benefit may be minimal. Remember: the power of the 529 plan lies in its ability to grow tax-deferred over a period of time. The key is giving the funds enough time to grow in the first place. If Noah and Sophia are younger, in grade school, or planning on a doctorate while currently in high school, funding a 529 plan makes more sense, as the longer timeline allows compounding dollars to accumulate tax-deferred.


Tax Benefits and Plans Range in Different States

Placing money in a 529 plan provides for considerable federal tax benefits, but additional state tax benefits may also be available depending on where you live. Be sure to check with your state’s plan to see if they offer you a state income deduction for your 529 plan contributions.

Unfortunately for California residents, the golden state does not offer a state tax incentive for 529 contributions. But you have options as to where you open your 529 account. Even though you may not have a state tax incentive when funding 529 contributions, it may make sense to open a 529 account in another state. Why? Investment options and fees range significantly between providers.

For those looking for a one-time, “set it and forget it automated fund choice, most plans offer an age-based investment option which automatically adjusts depending on the beneficiary’s age.

When the child ages and gets closer to college-age, the risk ratchets down significantly. For example, if Sophia were 5, her investment allocation would likely be invested in more equities than fixed income. At 17, that ratio is likely reversed, with much less exposure to equities, if at all. Generally speaking, these low-maintenance funds are the desired choice for many, as they are typically less expensive than the static or customized investment alternatives found in most other plans.

If you opt for a more customized investment approach, there is a limit on how many changes you can make to the investment allocation each year. (Congress likely didn’t want day-traders to play around in portfolios whose sole purpose is funding a child’s education.)

As the law is currently written, you are allowed two allocation changes per year.


Changes to 529s for 2018, and Beyond

The 529 plan was first established in 1996, but the 2018 version represents one of the most fundamental shifts in the plan’s history. A last-minute amendment to the 2017 TCJA now allows for 529 dollars to be used to fund private or religious education at the K-12 level, in addition to their traditional higher education utility. There are some limitations to be aware of; you are allowed to distribute a maximum of $10,000 in any one tax year per beneficiary under this newly-expanded definition.


In other words, even if Sophia has two 529 plans in her name and $20,000 in private school expenses for the year, only $10,000 amongs all plans may be distributed tax and penalty-free. Depending on where you live, that $10,000 can be more than enough or simply a portion of Sophia’s annual tuition for private or religious education at the K-12 level. Regardless, having the option is better than not.

It’s worth mentioning, at the time of publishing this article, not all states have amended their laws to mirror the newly-revised federal code on K-12 529 plan distributions. California has yet to amend their state law. Thus, in our example, if you were to distribute funds to Sophia for her private high school tuition as a California resident, you would be allowed to do so free of federal income taxes, up to the $10,000 annual limit, but may be subject to state taxes on those dollars, at least until the state legislation is revised. For the time being, this is something to keep an eye on.

For more on how 529 plans might help your specific college planning needs, talk to your advisor. To involve your kids with planning, no matter their current age, consider forming a family council

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Topics: Financial Planning, Saving, Budgeting and Debt Management, Kids and Money