Ultimate Guide to 529 Plans and College Savings

As a rule, all 529 plans accept contributions from anyone – you don’t have to be the parent or even a relative to help out!
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If you want to contribute to a child’s existing 529 plan, the most universal way is by mailing a check. The check should be payable to the 529 plan, and you should include the child’s full name and account number on the memo line. Of course, if you don’t know the account number (or do not want to write a physical check) then Backer is a great solution because it was built to get your extended community involved in saving for college.

In short, anyone over the age of 18. You don’t need to be a grandparent, parent, or blood relative to open a 529 plan for a child. In some instances, even a company can open a 529 plan. You can open a 529 plan for your own educational expenses, too, if you’re planning to go back to school.

But no matter what, a 529 plan can only have one owner.

You’ll start by choosing between two plan types: a prepaid tuition plan and a college savings plan.

If you choose a prepaid tuition plan, you’ll pay current prices for future college tuition. There are a small number of prepaid tuition plans out there, and many of them have state residency requirements. Prepaid tuition plans can often only be used for tuition and fees.

If you choose a college savings plan, your child will have a greater range of choices about when and how to use the money. There are many more options for college savings plans and they are the better choice for most people because you can use them for most any school and they can be used for more types of expenses.

Then you’ll choose a beneficiary, which is the person you’re saving for. If you don't have their Social Security number on hand, you can always name yourself as the beneficiary and update it to be someone else down the road.

Next, you’ll actually open the plan. The vast majority of plans have online application processes, though you can also mail paper forms. Open a 529 through Backer now.

You can name anyone as a 529 beneficiary – your child, grandchild, niece or nephew, a friend’s child, your spouse, or even yourself.

The only rule is that there can be only one beneficiary on a 529 plan. You’ll also need that person’s Social Security number or tax identification number and personal details in order to name them as the beneficiary.

With a 529 college savings plan, it doesn’t matter where your child chooses to go to school. They can use 529 plan funds for expenses at any eligible four-year college or university, including some universities abroad. The school can be public or private and does not need to be located in the state where your 529 plan is based or the state where you live.

Additionally, expenses at two-year associate’s degree programs, trade schools, and vocational schools are also eligible.

Technically, you can use a single 529 plan to fund education expenses for multiple children, but it can be complicated and logistically challenging depending on the ages of your children.

When you withdraw funds, you must use that money for education expenses for the named beneficiary. 529 plans can only have one beneficiary, so if you wanted to use a single account for multiple children you would have to make sure  beneficiary is right each time you make a  withdrawal.

If your children are several years apart and won’t have education expenses during the same years, it may not be a big deal to use the same 529 plan for both or all of them. But if your children will overlap in school, it may simplify your life to open an individual 529 plan for each child. Doing so will also make it easier to choose the right investment portfolio based on the child’s age. Some states’ plans allow additional tax deductions for additional beneficiaries, so that should be part of your calculus as well.

529s are for anyone who is expecting to have education expenses in their future. A—age isn’t a factor in whether or not someone is eligible for a 529 plan.

For example, you can save for yourself in a 529 plan if you’re planning to go back to school or want to get a certification so you can make a career change. The funds in a 529 plan can also be used for paying off a certain amount of student loan debt.

Unlike other types of tax-advantaged investment accounts such as a Roth IRA, there are no income limits for people who want to contribute to a 529 plan.

You can transfer money from a custodial account, such as an UGMA or UTMA, to a 529 that lists them as the beneficiary. First, you’ll have to cash out the custodial account, then contribute the money to a 529 with your child as the beneficiary. This will likely trigger taxes on the earnings in the custodial account.

If you’re funding a 529 plan with money directly from a custodial account, the result will be a custodial 529, which has slight differences from a typical 529 plan. The rules around custodial 529s are more limiting – e.g.,you cannot change the beneficiary of the custodial 529 plan.

If education is important to you, then switching to a 529 is likely worth the inconvenience. 529 plans have more beneficial tax treatment than custodial accounts since the funds grow tax-free and can be withdrawn tax-free if used to pay for qualified education expenses. Meanwhile, growth on custodial accounts can be taxed.

Additionally, custodial accounts are considered an asset of the child, which means they can work against them when they’re evaluated for need-based financial aid. 529 plans are weighed much less heavily.

To open a 529 plan, you’ll need the Social Security or individual taxpayer identification number, address, email address, and date of birth for both yourself and the intended beneficiary. You’ll also want to have your bank information ready so you can start contributing!

Your investment options will vary depending on the 529 plan you choose, so make sure you review them before you commit.

529 plan portfolio options often include mutual funds and ETFs, as well as FDIC-insured assets like CDs and interest-bearing savings accounts.

You will likely also have a choice between static portfolios (where the investment mix remains the same over time) and an age-based strategy (where the riskiness of the asset allocation in the 529 plan will decrease as time passes and the beneficiary gets closer to needing the money to pay for school).

Many 529 plans offer an actively-managed option, in which an investing professional chooses your investment mix. This typically results in higher fees.

It depends on the type of 529 plan. Some prepaid tuition plans have an enrollment period and you can only open a plan during that time.

529 college savings plans, on the other hand, are not subject to an enrollment period. You can open one whenever you’d like.

There’s no one-size-fits-all number that every parent should try to achieve to help their child afford college and avoid student debt.

Considering the rising cost of college, most parents don’t plan to pay the entire bill for a four-year education. According to recent research from student lender Sallie Mae, parents tend to cover about 54% of their children’s costs for tuition and fees, room and board, and other college expenses.

Some experts recommend planning to save the average cost of a college education as of the year the baby was born. Others say that you should save $2,000 multiplied by your child’s current age until they graduate from high school.

The most important thing is deciding how much of college expenses you will plan to cover, and then setting a monthly savings goal to help you get there.

The maximum amount that can be contributed to a 529 plan for a single beneficiary varies by state. These limits, which exist because 529 plans are only supposed to cover the cost of getting an education, range from $235,000 to $529,000.

There are no annual limits for 529 contributions, as long as they don’t exceed the plan limits referenced above. Gift taxes apply if you contribute more than $15,000 per beneficiary per year as an individual, or $30,000 as a married couple, although there is something called “superfunding” that will let you make 5 years of contributions at once

529 plans are known for their lack of restrictions, particularly compared to other college savings vehicles – anyone can contribute, there are no age limits, you can shift beneficiaries easily, and there’s a wide swath of things that count as “education expenses.” But there are some limitations.

The most significant? Any earnings withdrawn for expenses that aren’t related to higher education will be subject to income tax and a 10% penalty.

There’s no need to contribute a certain amount per month to a 529 plan. You can stop any automatic contributions whenever you need, and if it works better for your situation, you can contribute in lump sums whenever you can.

With the exception of custodial 529 plans, you can transfer a 529 plan to another beneficiary at any time. You can also roll 529 funds over to another 529 plan with a different beneficiary, such as between siblings.

You can roll funds from one 529 plan into another 529 plan for the same beneficiary (e.g., in another state) once per 12-month period without being subject to income tax. You can make investment changes twice per calendar year and change beneficiaries to a qualifying family member at any time (e.g., a spouse, child, siblings or step-siblings, first cousin, niece or nephew).

You can choose any 529 plan, regardless of the state where you live or the state where your beneficiary might attend college. With the exception of Wyoming, each state has its own option for 529 plans, and each plan has different rules, contribution limits, investment options, and tax regulations.

For example, if you live in Ohio, you can deduct up to $4,000 per beneficiary per year on your state taxes, plus unlimited carryforward (in addition to the typical tax advantages of contributing to a 529). That means that if you contribute more than $4,000 for one beneficiary in a certain year, you can claim that tax benefit in future years.

Meanwhile, contributions in Pennsylvania are state-tax deductible up to $15,000 per beneficiary per year, and as what’s called a “tax parity state,” you can claim these advantages even if you use a plan from another state. A married couple can deduct up to $30,000 per beneficiary per year as long as both individuals earn at least $15,000 in taxable income. Additionally, the total value of the 529 plan is exempt from inheritance tax. The assets won’t be counted if your child applies for financial aid from the state of Pennsylvania (whereas other 529s would be considered), and you can designate part or all of your state tax refund to go directly into your 529 plan. Finally, if you choose this plan, your student will be eligible for tuition discounts to over 300 private colleges around the world through the SAGE Scholars Tuition Rewards program.

In Maryland, someone who contributes to a future student’s 529 plan can deduct up to $2,500 from their Maryland taxes per beneficiary, per plan type, per year, with carryforward up to 10 years. “Per plan type” means that a parent could contribute to a college savings plan and a prepaid college trust plan for the same beneficiary and deduct up to $2,500 for each. A married couple could deduct up to $10,000 per year on their Maryland taxes for a single beneficiary.

Compare that to Iowa, where taxpayers can deduct up to $3,474 in state taxes per beneficiary in 2021, a number that is adjusted for inflation each year. A married couple with two kids can deduct a total of $13,896 in 2021 on their Iowa tax return. Additionally, as with all 529 plans,  you can contribute up to $75,000 per year per beneficiary without exceeding the gift tax exclusion, which you typically risk after gifting $15,000 to one person. You just have to make sure that you don’t make any further contributions for that beneficiary for the following four years.