Content Corner | Advisor Tips for 529 Plans

By Goldman Sachs Ayco Personal Financial Management

School may be out for summer, but it’s still a good time to think about education funding for your loved ones—and 529 plans are a popular option. We’ve gathered statistics, tips and answers to your 529 education savings plan questions from our financial advisors.

Preparing for the cost of college

Planning for higher education costs can be stressful! According to Education Data, on average, parents expect to pay roughly 30% of their child’s college expenses. The good news is they conclude parents tend to pay 10% of their child’s college expenses.1

Parents expect to pay roughly 30% of their child’s college expenses. Parents tend to pay 10% of their child’s college expenses. Source: Hanson, M. (2021, October 13). “College Savings Statistics.” EducationData.org. https://educationdata.org/college-savings-statistics

What is a 529?

A 529 plan is an education funding savings account that can be used to cover college expenses, and up to $10,000 per year for elementary or secondary, public, private or religious school expenses. This is an investment account that you can use to help grow your savings and allow for tax-free distributions if used for qualified educational expenses.

There are a few different options for saving for your loved one’s education, but 529s are among the most popular—and for good reason. Speaking with a financial advisor can help you determine which savings option makes the most sense for you and your family.

Statistic: 30% of college savings accounts are 529 plans. Source: Hanson, M. (2021, October 13). “College Savings Statistics.” EducationData.org. https://educationdata.org/college-savings-statistics

What are the benefits of a 529?

Any earnings from investing in a 529 can be taken out free of federal taxes when used on qualified education expenses. Additionally, depending on which state you live in, you could be eligible for a state income tax deduction on contributions. Contact a tax professional for information on your specific situation.2

Quote: 529s are excellent tools for high net-worth families to reduce their estate, maintain control over their money, and simultaneously build tax-free generational assets for their loved ones. From: Erik Jensen, VP, Head of Office in Palm Desert

When you’re ready to pay your loved ones’ qualifying education costs, you can withdraw the money without fear of tax liability. Pulling money from the 529 for a non-qualified expense could have multiple consequences such as tax implications. Before making a decision, you should consult with a tax professional.

What are the limits of a 529?

529 contributions are considered gifts, so the annual gift tax exclusion limit applies. In 2022, the limit is $16,000 per donor, per beneficiary.3 If you contribute over $16,000 you must report the excess contributions on IRS form 709, and it will count against your lifetime gift tax exclusion.

You are allowed to make a five-year gift contribution—a lump sum of $80,000 per beneficiary in one year to cover the next five years—but you won’t be allowed to contribute anything else for those next five years.

There’s also a total contribution limit for the 529 plan that varies by state—you can work with a financial advisor to find out what this is for you.

Where do I start?

Quote: While 529 Plan contributions are not deductible on your federal income tax, many states offer a deduction for contributions made to a resident’s state sponsored plan. First, you should check to see if your state offers this incentive. From: Terri Ward, Financial Advisor

Financial Advisor Terri adds that if your state doesn’t offer a tax deduction, or you live in a state with no income tax, “you can easily research the plan that is right for you. In general, look for plans that make it easy to invest, have low costs and allow you to automate your investments by using a target date of your child’s enrollment.”

What if they don’t need all the money I’ve saved?

Quote: Saving more than you need in your 529 is a common concern. If this happens, you can either change the plan’s beneficiary or withdraw the money and pay income taxes on the gains. From: Daphne Hu, Financial Advisor

Keep in mind, there is an exception for scholarships. If your child is awarded a scholarship, you can withdraw up to that amount from your 529 plan without having to pay a 10% penalty.4

Are there other education savings account options?

Other than 529s, you can use savings vehicles such as Coverdell Education Savings Accounts, Custodial Accounts, Roth IRAs and your brokerage accounts to cover your child’s education costs. When determining which account is best for your situation, you should consider criteria such as maximum contribution limits, whether or not they allow tax-deferred earnings and tax-free distributions, and whose asset is considered to determine financial aid eligibility.

If you’re looking for an investment account dedicated to growing your education savings, Coverdell ESAs and 529 plans are two of the most popular. The main difference between them is the contribution limit and investment options. For Coverdell ESAs, you’re limited to contributing $2,000 a year per beneficiary, vs the 529’s $16,000 limit as mentioned above. 529 plans have limited investment options determined by the state, while Coverdell ESAs offer a broader range.

How do I know if a 529 is right for me?

A few questions to ask yourself are: What level of control do you want over your loved one’s education savings account? What kinds of investments do you want?

If you’re still not sure, call your financial advisor for personalized advice on your finances. They’ll go deeper to understand your mindset and to take your full financial life into account so you can focus on what matters most—this new and exciting chapter for you and your loved one.

1Hanson, M. (2021, October 13). “College Savings Statistics.” EducationData.org.
https://educationdata.org/college-savings-statistics.

2Goldman Sachs Personal Financial Management does not provide tax advice.


3Flynn, K. (2022, March 29). “Maximum 529 Plan Contribution Limits by State.” Saving for College. https://www.savingforcollege.com/article/maximum-529-plan-contribution-limits-by-state#:~:text=529%20plans%20do%20not%20have,the%20annual%20gift%20tax%20exclusion

4Probasco, J. (2021, November 1). “A Penalty-Free Way to Get 529 Money Back.” Investopedia.com. https://www.investopedia.com/news/penaltyfree-way-get-529-money-back/#:~:text=If%20your%20child%20receives%20a,of%20debate%20among%20tax%20experts.

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ABOUT THE AUTHOR

Goldman Sachs Ayco Personal Financial Management

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