Whether you’re new to 529 plans or you’ve already opened a 529 college savings and investment account, you probably want to save and grow as much college money as you can.
Previously, I provided an overview of some core 529 plan strategies that can help you maximize your savings and growth. But there are additional advanced strategies that many people never know about, and even many financial advisors don’t take advantage of these strategies for their clients.
As a Certified Financial Planner® for over 20 years, I’ve taught these strategies to hundreds of families as I’ve helped them maximize their 529 plan contributions, earnings, tax breaks and other benefits.
In this article, we’ll review some of these advanced strategies and how you can apply them to grow and maximize your own 529 plan investments and benefits. Let’s get started and take a look.
Cycle Money Through Your 529 Plan.
One of the big benefits of 529 plans is that you can potentially qualify for state tax deductions based on your 529 plan contributions. Depending on your state and how much you contribute in a given year, you could qualify for a deduction that’s worth hundreds or thousands of dollars on your tax return.
This is where cycling money through your 529 plan is a potentially smart strategy. Cycling can help you qualify for more tax deductions and maximize them, by moving money through your 529 plan. This is a strategy that I’ve used with many of my financial advising clients.
For example, let’s say you have a child who’s already in college, and you’re about to pay a $20,000 bill for tuition, room and board, and other qualifying expenses. Or maybe you’re in one of the states where 529 plan funds can be used to pay for K-12 expenses such as grade school or high school tuition, and you’re about to pay a $20,000 bill from your private school.
Let’s suppose that you’re planning to pay the bill out of a taxable non-529 account such as a high-yield savings account at your bank.
Depending on your state, its tax rules, and your adjusted gross income, if you put money into your 529 plan first, instead of immediately paying it out of your bank account, it will count as a contribution to your 529 plan. This means you can contribute to your 529 plan first, then pay the bill from your plan account, and your temporary contribution to your 529 account will potentially count toward a major tax deduction.
In some states, that $20,000 contribution to your 529 plan could add up to $1,200 or more in tax savings, which can lower your tax bill or provide you with a larger refund that you can use to save and invest more for college. Alternatively, you can use your tax savings for some other purpose. Even if you’re only contributing a smaller amount to your 529 plan, you could still potentially save hundreds of dollars on your taxes in many states.
This is what makes cycling your money a smart move to consider. But first you need to know your state’s tax rules and how deductions work in your state.
Be careful and make sure you understand your state’s tax rules for 529 plan contributions, such as income requirements, whether there are limits to qualifying contributions, and whether the tax benefits are per beneficiary or per tax return.
For example, in my home state of Wisconsin, the tax benefits are per beneficiary, and there are limits to how much you can deduct for each beneficiary as well. This is why I typically set up multiple 529 plan accounts for my clients who have multiple children.
Another important thing to keep in mind is that some states have net contribution rules. They give you tax benefits on your net contribution for the year and not the overall total. As an example, let’s say you contributed $10,000 into your 529 plan during a given year, but you withdrew $5,000 to help pay for some qualifying educational expenses. For tax purposes, a state might only count the net total of $5,000 after your withdrawal, rather than the total you actually contributed.
If you have questions about how 529 plans and related tax benefits work in your state, do a quick online search for more information, or contact me and I can provide you with the details.
Carry Forward Your 529 Plan Benefits.
Another 529 plan benefit that varies from state to state is whether you can carry your benefits forward. If 529 benefits carry forward in your state, it means your 529 plan contributions will continue to count toward potential tax deductions in future years and not just in the year you made them.
For example, let’s say you started a 529 plan by making a large lump-sum contribution of $50,000. In some states, that contribution carries forward for the purposes of tax deductions. Your contribution will continue to count toward potential tax benefits in subsequent years. In other states, contributions don’t carry forward like this, and they only count for the tax year in which you originally made them.
If your 529 plan benefits don’t carry forward, you may want to consider doing some creative things to spread out your contributions.
You can work with a tax professional, accountant, or a financial advisor to help you figure out the right moves for your family. For example, as a Certified Financial Planner, I’m licensed in many states, and I manage 529 plans for clients nationwide. I regularly expand my licensing into new states as well, so I can recommend 529 plan strategies, help you manage your contributions, and work with a tax advisor to help you maximize your college and tax savings.
Contact me now, and we can set up a quick call to discuss your situation and determine your best options.
Have Relatives Set Up 529 Plan Accounts.
Anyone can own a 529 account and choose their preferred beneficiary. This means relatives such as grandparents, aunts, uncles, or others can set up their own 529 plans and help your child pay for college.
Since a 529 plan is owned in the name of the investor and not in the name of the student, if the plan belongs to someone other than the student’s parents, it won’t count against the family as an asset for financial aid purposes. Only assets in the parents’ and student’s name are counted in financial aid calculations.
This means relatives other than parents can set up a 529 plan account, make contributions, and later withdraw money from that account to pay for qualifying educational expenses on behalf of your student, all without it ever reducing your potential qualification for financial aid.
Also, rules have recently been changed, and as of 2024, relatives such as grandparents will be able to pay for qualifying student expenses out of their 529 plan account, without it being counted as untaxed income for the student. Previously, if payments like these were made within the student’s first two years of college, they would be counted as untaxed income for the student.
Non-parents who set up 529 plans can help children pay for college with the same potential federal and tax benefits, all while maintaining complete control over the funds. This also means parents can take money that they’ve saved for college and shift it over to a relatives’s 529 account, which can protect that money from financial aid asset calculations.
However, keep in mind that once you move that money into someone else’s 529 account, they have control over it. Grandma and Grandpa could take that money and go to Hawai, although they would have to pay taxes and possible penalties for using the money for something other than qualifying educational expenses. That brings us to another benefit of having relatives set up a 529 plan account, which is that they can be flexible in how they eventually use the money.
That brings us to another benefit of having relatives set up a 529 plan account, which is that they can be flexible in how they eventually use the money.
Flexibility in How Relatives Can Use Their 529 Plan Funds
While you have to pay taxes and sometimes penalties for withdrawals from a 529 account that aren’t used for qualifying educational expenses, the money you invest still typically grows, and if you don’t end up needing to spend it all on college, you can use the money toward retirement or other expenses.
For example, let’s say that Grandma and Grandpa set up a 529 plan when your child was young, and there is now $50,000 in the account. But your student qualified for grants and scholarships, and once they graduate, they’ve only ended up needing $30,000 of that money for college. Grandma and Grandpa can withdraw the remaining $20,000 and use it for anything they want, albeit with some taxes and potential penalties they’ll have to pay. But they’ll still end up with a large portion of that money to use for their own purposes.
Sometimes relatives such as grandparents are worried what might happen if they’re not around by the time their grandkids go off to college. Fortunately, relatives can list a successor owner of the 529 account in the event that they’re no longer alive to manage the account. In some cases, grandparents list their children or their grandchildren as the successor owner, depending on how old they might be.
Before you set up anything like this, you should make sure you understand the rules and potential tax implications, and how they might apply to a different future account owner. This is where configuring your 529 plan gets into the realm of estate planning, so you need to proceed with caution. However, if you make the right moves, designating a successor owner of your 529 account can provide some great peace of mind for grandparents or other family members.
Do Some Legacy Planning with Your 529 Plan.
One way to take your 529 planning to the next level is to make it part of your legacy planning. Some families are able to contribute and invest more money into their 529 plans than their children or grandchildren might ever use, and their projected rates of return create an opportunity to do some long-term legacy planning for future generations.
This means you can potentially use 529 plans as part of investments that will hopefully grow and provide benefits for two, three or even four generations into the future. It takes some serious planning to capitalize on this opportunity and determine what might fit your situation.
For example, it’s crucial to understand the 529 plan rules, the limits to how much you can contribute, and determine whether you need to set up multiple accounts for legacy financial planning.
However, with the right understanding, the right moves, and a good financial planner to help you along the way, your 529 plan contributions could be part of a long-term legacy that you can leave behind to help future generations. You can help future family members pay for their education and still have funds remaining to help them elsewhere in their lives.
Take a “Global” Approach to Your Financial Planning.
As families begin to invest and explore all the options and benefits of 529 plans, it creates new opportunities to think globally about their money and investments.
Thinking globally about your money means looking at your funds and investments as a whole, as part of a bigger picture. Instead of strictly saving or investing money for specific purposes, such as a new car, a vacation, or college, you take a global view of all of your money and how you can manage and use it most effectively.
When you take a global approach to financial planning, you don’t focus so much on putting your money into specific buckets and only using or investing it for those purposes. You look for opportunities to be smart and creative in how you use and invest your money, so you can maximize your return, take advantage of tax breaks, and do the best things at the right times for your overall financial benefit.
For example, contributing an extra $10,000 to your 529 plan could potentially help you grow more money for college, qualify for tax breaks, and still have the flexibility to use any leftover funds for other things once you’ve paid for college. But if you insist on putting that $10,000 into a low-yield savings account at your bank instead, because you’re planning to buy a new car in five years, and you miss out on an opportunity to make a much bigger gain as a result, that can potentially work against you financially.
Instead of putting your money in specific buckets and restricting how you use it, a global approach allows you to look at the bigger picture and do what makes the best sense and will potentially generate the best overall return.
Similarly, if the stock market has been down and you’re only a year away from having to pay for college, you may be worried that your 529 plan account might have lost too much money, and you might have to cancel college or limit your student’s options. But if you’ve taken a global approach to your investments, then hopefully you have created a diversified portfolio where you have reserves available from other accounts and investments, and you can use or move some of those funds, as needed, to help pay for college.
There are a lot of ways to potentially view, move and invest your money globally, so you can minimize risk, maximize your return, and have the flexibility to pay for what you need when the time comes.
Explore Advanced Strategies for Your 529 Account and Your Family Finances.
Smart financial planning with advanced strategies can do far more than just help you pay for college. It can potentially transform your life and your family’s future for the better.
To learn more about advanced strategies to help you save, invest and earn more money with your 529 plan, and to explore better financial planning for your family, connect with me now.
As a Certified Financial Planner for over 20 years, I’ve helped hundreds of families plan, save and invest their money wisely, using the latest proven strategies. I can help you identify the right choices for your family and determine which options will maximize your savings, investments and growth, so you can help pay for college, plan for your retirement, and build a better financial future.
To get started, contact me now to schedule a free 30-minute consultation to learn more about my services and determine if they’re the right fit for you.
An Important Reminder About 529 Plans
Before you invest in any state’s 529 plan, please carefully consider your investment objectives and any risks, charges and expenses. This information is contained in fund prospectuses, summary prospectuses, and 529 Product Program Descriptions and other documents, which are available from a financial professional or directly from a 529 plan’s website.
Read this information carefully before investing. Some 529 plans are better than others because they offer more investment options or lower fees.
Also, make sure you understand how 529 plans work in your state. It’s important to know either there are potential state tax deductions for 529 plan contributions and how your state’s 529 plan options and fees compare to those of other states.
It’s also a good idea to consult a tax professional, to make sure you understand the state and federal tax rules around how you make your withdrawals and how you can use your funds on qualified expenses. If you use your money for purposes other than qualified expenses, then your withdrawals can be subject to a 10% federal tax penalty, state penalties, and federal as well as state income tax.
How to Find the Right 529 Plan Strategies for Your Family
To learn more 529 plans, how to start up an account, and the best college savings strategies for your family, contact me for expert guidance.
As a Certified Financial Planner for over 20 years, I’ve been helping families plan, save and invest money for college with 529 plans and other great options. I can help you identify the right choices for your family and determine which options will maximize your savings and growth so you can help make your children’s or grandchildren’s college dreams come true
To get started, contact me now.
Registered Representative, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, Member FINRA / SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Baldridge College Solutions and Cambridge are not affiliated.
This communication is strictly intended for individuals residing in the states of California, Colorado, Florida, Georgia, Iowa, Illinois, Indiana, Maryland, Minnesota, Missouri, Montana, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Texas, Utah, Virginia, and Wisconsin. No offers may be made or accepted from any resident outside the specific states referenced.
Helpful Articles and Resources