Use 529s to Pay for Education and Save on Taxes


By Mark A. Vergenes


529 plans are a tax-free way to save for a child’s education. They’re also called college savings plans, qualified tuition programs, or QTPs. Like a 401(k) retirement plan, they require plan holders to invest money in anticipation of a future event. Neither the principal nor the growth is taxed. And when it comes time to withdraw for qualified education expenses, those withdrawals are not taxed.

As with any tax-free saving plan, 529s come with many restrictions. Guidelines vary by state and are changing all the time, but here are a few common parameters to keep in mind.

  • 529s have high contribution limits, usually $350,000 and up.
  • Funds must be used for educational purposes, including tuition, room, board, books, and school supplies at any accredited college or graduate school in the U.S. or abroad.
  • It can be used to cover k-12 tuition up to $10,000 per year.
  • The plan can be used to cover costs for certified apprenticeship programs, including fees, supplies, and equipment.
  • Each beneficiary of the plan can use the money to repay student loans up to $10,000 and $10,000 per each of the beneficiary’s siblings.
  • The beneficiary can be changed to another qualified family member, or funds can be rolled over or transferred into a different 529 plan, one time each calendar year.
  • Owners of 529 accounts may roll over or transfer funds to an ABLE account without paying federal taxes or penalties.
  • If funds are not used for qualified education expenses, they are taxed and subject to a ten percent penalty.
  • As with retirement funds, investments in a 529 plan are a risk, and past performance is no guarantee of how an investment will perform in the future. As a result, the investments you choose may lose money or not perform well enough to cover college costs.
  • Although most aspects of the 529 savings plans are governed by federal law, individual states manage the implementation. As a result, there are now more than 50 different savings plans from which to choose. Check out your state’s tax benefits here.

Because there are variations in state plans, it may be helpful to discuss your options with an experienced financial professional. In addition, some 529 savings plans are advisor-sold only, meaning you must go through a designated financial advisor to open an account.

Mark Vergenes is president of MIRUS Financial Partners, and president of the Pennsylvania Parking Association.