Quick Guide to 529 Plans

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529 plans are a tool for those looking to save for higher education for their children, grandchildren or any family member. While most people know that they are one of the most popular education saving methods, this resource may give you the information you need to help understand if this may be an appropriate option for you.

529 Plans May Provide Federal and State Tax Benefits Regardless of Your Income

While some education savings plans have income limitations to receive federal tax benefits, you can receive federal tax benefits for a 529 plan regardless of your income bracket. Your tax-free qualified withdrawals may be more valuable if you are in a higher income bracket with a 529 plan. Contributions by individuals up to $18,000 per year, and $36,000 per married couple, are not subject to the federal gift tax. You can also front-load a 529 plan (this involves giving 5 years' worth of annual gifts, up to $18,000 at once, for a total of $90,000 per beneficiary) without having to pay a gift tax. The concept behind front-loading a 529 plan is to allow earnings to be compounded on more money for a longer period.

For Washington residents, it is important to keep in mind that there are no state tax benefits and contributions to a 529 plan are not deductible on your federal taxes. However, at least 30 states, including the District of Columbia, offer a full or partial state tax deduction or a tax credit for 529 plan contributions. Additionally,  most states require you to contribute to an in-state plan to be eligible for a tax deduction.

You Don't Need to Be a Parent to Open Up a 529 Account

There is no restriction stating that only a parent of a child may open up an account on a student's behalf. Grandparents, friends, aunts, uncles and others may open an account, with the student is the beneficiary. A parent may also open an account and invite other family members to contribute. One notable change in 2024-25 school year to be aware of is that distributions from grandparent-owned 529 accounts are no longer considered income for the student, which is beneficial when determining financial aid eligibility during the FAFSA income test.

Money Doesn't Have to Be Lost if Your Child Doesn't Go to College

If your child decides not to continue their schooling, it does not mean that the funds are lost. You may change the beneficiary to another family member or make a nonqualified withdrawal. When making a nonqualified withdrawal, the earnings are subject to federal and state income tax and a 10% federal tax to recoup the tax deduction you received from initially contributing to the account.

Starting in 2024, unused funds in a 529 qualified tuition plan can now be distributed tax-free to a Roth IRA. The amount allowed depends on which is lower, either the normal Roth IRA limits (without income limits) or the total amount from the 529 accounts over the last five years plus any earned interest. The beneficiary must remain the same for at least 15 years and there is a lifetime limit of $35,000 per beneficiary. Click to learn more in our Secure Act 2.0 guide.

Education Savings Potential Impact on Financial Aid

Financial aid views the 529 plan as the parent's asset, not the student's, so it may only have a minimal impact when determining eligibility for financial aid, reducing it by no more than 5.64% of the plan's account value. If the account is under a grandparent's or other family member's name, it is not factored into financial aid eligibility but might be considered the student's income when withdrawals are made.

Money in a 529 Plan May Be Used for Tuition and Qualified Expenses

There are several qualified expenses that 529 plan funds may pay for aside from tuition, including books and certain software. They also may be used for supplies, technology, room and board for full or part-time students, and other school-related fees.

It's Not Too Late to Start a 529 Plan

While your 529 plan account may have longer to grow the earlier you start, you may benefit from opening one anytime. Since the earnings are automatically reinvested, the contributions to a 529 plan still have some time to grow, even if the account is not started until your child is in high school.

Talk to a Financial Advisor

Financial advisors at BECU Investment Services are here to help. Our team will take the time to get to know you, understand your goals and implement an investment strategy or education savings plan that's appropriate for you. Set up a complimentary consultation or call 206-439-5720 today.