Citi Personal Wealth Management

529 Plan for
Education –
4 Steps to
Help Maximize Savings

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There are many ways to build wealth for education, and 529 Qualified Tuition Savings Plans are one of the most common. Operated by a state, a 529 plan may be used to pay for almost all education expenses ( , room, tuition and board) for college and just about anyone can open one (including grandparents).1 In addition, some states allow for a 529 plan to cover elementary and secondary school education. (See table for details.) Withdrawals are tax–free as long as you use the money for qualified education expenses, but there are other benefits that aren't as well known.

These four steps can help ensure you're making the most of 529 savings plans.

Step 1: Determine if You are Eligible for a State Tax Deduction.

Several states offer a tax deduction for their residents who start a 529 plan. For example, participating in New York's 529 plan2 can mean a big tax savings for high earners who live in New York state. You can deduct up to $5,000 per year per person (or $10,000 for a joint filers).

Step 2: Find Out if There Are Any Scholarships or Other Benefits Offered by Your State's 529 Plan.

Some plans, such as New Jersey's 529 plan2, offer some scholarship funds to state residents whose children attend a college in New Jersey.

Step 3: Figure Out if Your Family Wants to Make Accelerated Contributions.

With a 529 plan, you, your spouse and anyone else, such as grandparents, can each make contributions of up to $15,000 per year without paying the gift tax. Additionally, each person can also make a lump sum of $75,000 in the first year of a five–year period, without triggering the gift tax. Essentially, you are up–fronting the funding of the plan. One warning: If you elect to do so, and you die before the end of that five–year period, the portion of the gift of the five–year period that was allocated to the period after your death will be included in your estate.

Step 4: Take Into Account a 529 Plan's Expenses and Investment Options Before Making a Decision.

An important point: You can open a 529 savings plan1 offered by any state, not just the one where you reside. A 529 plan offered in the state where you live may offer benefits such as a tax deduction. However, there are other aspects of a 529 plan to consider, such as the investment options, annual investment management expenses, and the beneficiary’s age/number of years until qualified tuition costs are incurred. How does the plan compare to other plans available? You need to take into account all aspects of a plan before making a decision.

To help you better understand how a 529 savings plan works and compares to other education savings products, such as the Coverdell Education Savings Account, here's a quick overview.

1 Keep in mind the owner of the plan can have an impact on the Free Application for Federal Student Aid (FAFSA). For example, if the child is the owner, then more of the 529 plan is counted to pay the college expenses vs. having someone other than the child, such as the parent.

2 Availability of varying state 529 savings plans are determined by the Broker/Dealer. Not all state 529 savings plans are available through Broker/Dealers.

Similarities and Differences Between 529 Plans and Coverdell Accounts

Similarities

  • Save for education by investing in stocks, bonds, mutual funds, and certificates of deposit.
  • Contributions aren't deductible on your federal income tax return, though a state–income tax deduction may be available for 529 contributions to in–state plans.
  • Earnings grow tax–deferred and you can make tax–free withdrawals as long as they're used for qualified education expenses.

Differences

  • A 529 typically allows changes to investments just once a year, while there are no such limits on the Coverdell.
  • Coverdell contributions are capped at $2,000 a year. You can fund these accounts only if your income falls below certain income thresholds.
  • In contrast, anyone can contribute up to $15,000 to a child's 529 in 2021 without triggering the gift tax.*
  • Starting in 2018, federal law now allows 529 plans to cover qualifying expenses for elementary and secondary (K–12). There is a $10,000 per year per child limit on withdrawals. Not all states and educational institutions have adopted this new tax law. A Coverdell account can be tapped for expenses from kindergarten through college.
*With a 529 plan, you can also make a lump sum of $75,000 in the first year of a five–year period, without triggering the gift tax. Essentially, you are up–fronting the funding of the plan. One warning: If you elect to do so, and you die before the end of that five–year period, the portion of the gift of the five–year period that was allocated to the period after your death will be included in your estate.