Done Buying Diapers? Don’t Forget About College

Aug 9, 2021 Mark Keating Posted in Articles, NBBJ

Originally published in North Bay Business Journal As college tuition soars, saving early for education is one of the best decisions parents and grandparents can make. If your children or grandchildren plan to attend college, a 529 savings plan is a great way to save. The earlier you begin, the longer you can save, and the more your money can benefit from tax-advantaged growth potential.


A 529 plan is an education savings plan operated by a state or educational institution designed to help families save for future college costs. There are two types:

  • Prepaid plans that allow families to buy “units” of tuition at a rate close to today’s prices. They are cashed in when the student attends school.
  • 529 college savings plans (most popular) that allow families to invest in preselected investment portfolios that grow (or shrink) in accordance with the markets.

Both types of plans have annual fees and operating costs associated with them. These expenses can range from nearly zero to almost 2 percent of invested assets, depending on the fund and types of investments offered. Because fees can have a significant impact on the growth of assets over time, it is important to research different plans, investment choices offered, and associated fees before selecting the plan that is right for you.


The 529 plan provide significant tax benefits. Besides accumulating sufficient funds to educate the next generation, these plans offer tax-free investment growth and withdrawals. Although there is no federal income tax benefit for contributing to a 529 plan, the money you invest grows tax-free as long as it is withdrawn and used for qualified, college-related expenses. So, you are getting more bang from your buck than if you invested in a taxable brokerage account. With skyrocketing college costs, saving in one of these plans over a period of years can be a lot less painful than writing those big tuition checks all at once. And, the tax savings can be significant.


U.S. residents, 18 years of age or older may invest in most state plans. In our practice, we often see grandparents or other relatives who wish to contribute to or set up a child’s college savings plan. The owner of the account, known as the participant, controls the account, including investment decisions and the distribution of assets.


Withdrawals from a 529 account can be taken at any time for any reason. However, if funds are not used for qualified higher education expenses, earnings are subject to federal income taxes at the recipient’s rate. A 10% federal penalty tax and possibly state or local tax are also added. Distributions for qualified higher education expenses are federal income tax free. For college savings plans, eligible institutions include most accredited colleges and graduate schools, including professional and trade schools. Foreign schools with attending students who qualify for federal financial aid also qualify. Contributions apply to a variety of qualified educational expenses including tuition, books, and room and board for those attending at least half time.


As of January 2018, families can use 529 plans to pay for up to $10,000 in tuition at private, public, or parochial elementary and secondary schools.


Grandparents can take advantage of possible gift and estate tax benefits. Contributions up to $75,000 per person ($150,000 per married couple) per beneficiary can be made in a single year, once every five years, without the money being subject to the federal gift tax under most circumstances. In some cases, these plans can play an important role in reducing future estate taxes. 529 Plans can be a win-win way to fund higher education, while saving taxes and — in some cases — reducing potential estate taxes. Please consult with your tax or financial professional to see if a 529 Plan makes sense for your family.