529 plan checklist for 2020 year-end

529 plan checklist for 2020 year-end

As year-end approaches, many families are making decisions about their 529 college savings plans. Whether saving for college or making withdrawals for expenses, there are many considerations that may need attention before the end of the year.

Families are saving more than ever in 529 plans and assets have soared over the past 10 years. Assets in 529 plans grew to $346 billion in 2019 from $88 billion in 2009, according to ISS Market Intelligence. In addition, research found that awareness about 529 plans has also risen.

chart of 529 assets

Strategies for funding a 529

  • Make sure to utilize the 2020 annual gift exemption before year-end ($15,000 per individual or $30,000 for couples splitting gifts).
  • For those who want to maximize funding a 529, consider “super-sizing” with a contribution before year-end utilizing the annual gift exclusion of $15,000. Then follow up with front-loading five years’ worth of gifts in early January ($75,000 per donor per student). This action would effectively fund $90,000 in a 529 plan all at once. For more information on this strategy, read our blog.
  • Consider funding a 529 when a child is young. With an early start, the account has more years to benefit from potential growth in investments and a longer time horizon to weather market swings.
  • Some states offer tax benefits for contributions to their own state-run 529 programs. In this case, explore the details of the tax benefit. For example, some states require a contribution before year-end in order to receive the state tax benefit. Other states require the contribution by the tax filing deadline. Savingforcollege.com compiles a list of state plans and their respective tax benefits. Families may also consult their state government website to make sure the details are up to date.
  • Other family members may want to get involved in college funding. The holidays provide an opportunity for giving the gift of education.

Review investments

  • Account owners may want to make adjustments to how the 529 plan is invested. While age-based options within plans will automatically adjust risk as the child gets older, those not using an age-based portfolio may need to consider their current risk allocation. Is current risk allocation commensurate with the time remaining before distributions are needed? As a reminder, 529 plans allow investment exchanges to be made twice per calendar year with no tax consequences.

Optimize the use of a 529 plan

  • Families may be able to benefit from recent changes to the definition of “qualified expenses” for 529 savings plans. Tax law changes in the past several years have expanded 529 accounts to allow for a $10,000 one-time distribution for student loan payments and $10,000 per year per student to pay for qualified apprenticeship programs or K-12 tuition expenses.

Considerations for withdrawals

  • Review withdrawals from 529 for the calendar year to make sure that withdrawals match up with qualified expenses during the year.
  • Understand the rules around using other education-related tax benefits, such as the American Opportunity Tax Credit (AOTC). Using other tax benefits may impact 529 plan distributions as rules prohibit doubling up on tax advantages. An AOTC can be claimed in the same year as a qualified distribution from a 529, as long as both benefits are not used for the same expenses.
  • Be mindful about financial aid. If you are filing for financial aid in the coming year, be aware of the rules, especially when planning a withdrawal from a 529 owned by someone other than the parent or student, such as a grandparent. Qualified distributions from a 529 or Coverdell education account owned by a non-parent for the benefit of the child are considered income to the student. Since the FAFSA calculation counts 50% of a student’s income as part of the Expected Family Contribution (EFC) calculation, this could lead to a drastic reduction in financial aid.

Seek expert advice

A financial professional can help guide decision-making around many of these actions. While there are tax advantages available with a 529 college savings plan, it’s important to understand the rules, both state and federal, and optimize the use of these savings.


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