9 Ways to Maximize the Benefits of a 529 Plan

The primary purpose of a 529 plan is to save for college expenses. These plans can cover tuition, fees, books, supplies, and even room and board for students enrolled at least half-time. By starting early, you can take advantage of the power of compound interest, allowing your savings to grow significantly over time. Additionally, contributions to a 529 plan may be tax-deductible at the state level, providing immediate tax benefits.

Key Tip: Start contributing as soon as possible, even if it’s a modest amount. The earlier you start, the more time your investments have to grow.

2. K-12 Education

Recent changes in federal tax laws have expanded the use of 529 plans to include up to $10,000 per year for K-12 tuition at private, public, or religious schools. This flexibility allows families to start utilizing the benefits of a 529 plan much earlier than previously possible. If you are considering private education for your children, this provision can be a significant financial relief.

Key Tip: Check with your state’s specific regulations, as not all states have adopted the federal rules for K-12 expenses.

3. Graduate and Professional Schools

529 plans are not just for undergraduate education. They can also be used for graduate and professional schools. Whether your child decides to pursue a master’s degree, law school, medical school, or another advanced degree, the funds in a 529 plan can cover these expenses. This can be particularly beneficial given the rising costs of higher education beyond the undergraduate level.

Key Tip: Keep contributing to the 529 plan even after your child starts their undergraduate program if they plan to go on to a graduate or post-graduate program down the line.

4. Continuing Education for Adults

Education isn’t just for children and young adults. Adults looking to further their education, change careers, or gain new skills can also benefit from a 529 plan. Funds can be used for a variety of educational programs, including community colleges, trade schools, and vocational programs. If you or your spouse are considering going back to school, a 529 plan can be a valuable resource.

Key Tip: If the original beneficiary of the plan doesn’t use all the funds, you can change the beneficiary to yourself or another family member without penalties.

5. Transferring to Other Family Members

If your child decides not to pursue higher education or receives a scholarship that covers most of their expenses, you have the option to change the beneficiary of the 529 plan to another qualifying family member. This includes siblings, cousins, nieces, nephews, or even yourself. This flexibility ensures that the funds you’ve saved won’t go to waste.

Key Tip: If the beneficiary of a 529 plan receives a scholarship, you can withdraw an amount equal to the scholarship from the 529 plan without incurring the usual 10% penalty on earnings. However, it’s important to note that while the penalty is waived, the earnings portion of the withdrawal will still be subject to federal and possibly state income taxes.

6. Special Needs Education

529 plans can also be used to cover education expenses for individuals with special needs. This includes specialized programs and services that might be necessary for their education and personal development. Utilizing a 529 plan for these purposes can alleviate some of the financial burdens associated with specialized education.

Key Tip: Ensure that the programs and services qualify under the 529 plan guidelines to avoid any penalties.

7. Paying Off Student Loans

Under the SECURE Act, up to $10,000 from a 529 plan can be used to repay the beneficiary’s student loans. Additionally, another $10,000 can be used to repay student loans for each of the beneficiary’s siblings. This provides a new avenue for utilizing leftover funds in a 529 plan, giving families more flexibility in managing education-related debt.

Key Tip: Use this option strategically, especially if there are no other immediate education expenses to cover.

8. Estate Planning Tool

For grandparents looking to reduce the size of their taxable estate, contributing to a grandchild’s 529 plan can be an effective strategy. Contributions to a 529 plan are considered completed gifts and qualify for the annual gift tax exclusion. You can even superfund a 529 plan by making five years' worth of contributions in one year without incurring gift taxes.

9. Employer Contributions

Some employers are now offering 529 plan contribution matches as part of their employee benefits packages. If your employer provides this option, it’s an excellent way to boost your savings with additional funds.

Key Tip: Take full advantage of any employer matches available, as this is essentially free money towards your child’s education.

A 529 plan is a versatile and powerful tool that can help you meet a variety of educational and financial goals. By understanding and utilizing the different ways a 529 plan can be used, you can maximize its benefits for your family. Whether you’re saving for your child’s college education, considering private K-12 schooling, planning for graduate school, or even contemplating your own continuing education, a 529 plan offers flexibility and significant tax advantages.