Four dos and don’ts of 529 plans

College tuition has continued to increase out of sync with inflation since the 1980s,1 leading many families to wonder how they’re going to afford higher education costs or what the best ways for them to do so are. Starting early is the general consensus, and a 529 college savings plan is one way to begin.

What is a 529 plan?

A 529 plan is a savings plan designed to help families accumulate funds for their children’s future education costs.

Legally referred to by the IRS as qualified tuition programs (QTPs), there are two types of 529 plans: prepaid tuition plans and education savings plans. Prepaid tuition plans allow savers to purchase credits for college tuition to be used in the future. Education savings plans open an account to save for a beneficiary. They are more common and are what most people think of when they hear the term “529 plan.”

How to choose a 529 plan

If you’re interested in opening a tax-advantaged education savings plan for a child or grandchild, you have a wide variety of options. According to the Securities and Exchange Commission, all fifty states and the District of Columbia sponsor at least one type of 529 plan.2

When selecting a 529 plan, it’s often difficult to identify the factors most important to your situation, partly due to the vast number of choices available for these types of accounts. It can also be a headache to figure out the dos and don’ts after you choose the plan.

So what are four dos and four don’ts to consider when working with a 529 plan?

DO start saving early if you can afford it

The average cost for tuition and fees at four-year public colleges has increased more than 50% (after adjusting for inflation) over the past decade.3 These costs are projected to continue to increase. It’s fitting, then, that one of the main reasons individuals begin a 529 plan is to help offset the cost of future college expenses.

Anyone can open a 529 plan or contribute to an existing account. Parents, grandparents, close or distant relatives, and even family friends can be account owners or contributors.

Anyone can be named as a beneficiary; you can even choose yourself as a beneficiary. Each beneficiary can also have multiple accounts from multiple owners. This means that there really is no limit on the number of accounts that can be set up by an owner or for a beneficiary.

DON’T ignore fees within the 529 plan

When looking at any investment, it’s important to ask, “What is this going to cost me?” Within a 529 plan, there are typically a few different types of fees to consider. These include:

  • Enrollment or application fees
  • Annual account maintenance fees
  • Program management fees
  • Expenses related to the underlying investments

For the fourth bullet specifically, it’s important to look out for the “load” that a broker-sold 529 plan would charge. This is paid to the broker as a commission for selling the plan itself. You may also be charged an annual distribution fee by the broker, anywhere from 0.25-1% of your investment.4

To easily compare the fees of various 529 plans, check out This site provides comprehensive, well-sourced information on many topics related to college or post-secondary school financing.

DO research whether your state offers a tax-incentive plan

No 529 plan has federal tax incentives, but many states offer a state tax incentive for setting up a 529 plan within the owner’s state of residence. Take note, however, that federal educational tax credits may be reduced by the amount of certain qualified expenses covered by the 529 plan.

Federal financial aid could also be affected by a 529 plan balance. It is best to check with your tax accountant to verify how federal tax credits or federal aid could be affected by the 529 plan of your choice.

DON’T be afraid of limits if you’d like to make a sizable dollar contribution to a 529 plan

For 2020, you may contribute up to $15,000 per beneficiary ($30,000 for married couples filing jointly) to a 529 plan without having to pay gift taxes or file a gift tax return.

Note that the $15,000 limit is the maximum total annual gift amount to an individual (not just to a 529 plan), so any additional gifts made directly to that individual would reduce the amount that can be contributed to a 529 plan on his or her behalf.  It is also important to understand that an individual may gift a lump sum amount of up to five years of this annual gift amount at once. This includes sums up to $75,000 ($150,000 for married couples filing jointly) per beneficiary in 2020. Gifting five years at a time is not a taxable gift, but it does require filing a gift tax return.

Another benefit to the 529 plan is that the beneficiaries can be changed at any time. For instance, if one of the beneficiaries does not use the entire amount, the excess can be shifted to another immediate family member or even certain extended family members without tax implications.

Because of this flexibility, 529 plans can be a great vehicle for estate planning, as many plans allow contributions in excess of $200,000. Another benefit is that the account can continue to remain under the owner’s control but be moved out of his/her estate.

DO consider using an age-based investment allocation

Most plans offer a variety of investment options, including various age-based allocations. Using an age-based investment allocation takes the guesswork out of which investments to use within the 529 plan, as well as changing the stock/bond shift to a more conservative allocation as the beneficiary nears college-age.

DON’T take withdrawals from the account outside of eligible educational expenses if avoidable

Since the 529 plan is created for college or post-secondary school expenses, any withdrawals that are not used for school-related expenses may result in income tax on the earnings, as well as an additional 10% penalty tax.

Qualified higher education expenses typically include tuition, room and board, mandatory fees, books, supplies and any equipment required for study at an accredited college, university or vocational school in the United States and at some foreign universities.5

DO carefully consider the potential drawbacks to prepaid tuition plans

Prepaid tuition plans offer the attractive benefit of “locking in” your future education costs, but they have a number of disadvantages.

Most state-sponsored prepaid tuition plans are only available to residents, so your options are much more limited compared to an education savings plan. While some plans are backed by the full faith and credit of the state, others provide no guarantees. If the child decides to attend a university that isn’t covered by the prepaid plan, it generally is not as beneficial.

While many plans allow the funds in a prepaid plan to be applied to other universities or transferred to a sibling, you lose the benefit of guaranteed tuition. If those options aren’t available, or your child doesn’t go to college, most plans will only refund your original contribution with a reduced amount of interest earned, or no interest at all.

Last but not least, costs outside of tuition that could otherwise be covered by an education savings plan (e.g., room and board, fees, books, supplies and equipment), generally cannot be paid for by prepaid tuition plans.

DON’T worry about overfunding the 529 plan in the event that a beneficiary receives a scholarship

One exception to the 10% penalty on nonqualified withdrawals mentioned above is to reimburse amounts earned in a scholarship. Any earnings on that portion of the 529 plan distribution will still be subject to income tax, but you can avoid the 10% penalty.

Need help reaching your college savings goals?

If you need additional assistance when navigating and selecting a 529 plan, speak with a planning professional who can provide you with guidance for your particular situation and needs.


Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services, fees and conflicts of interest is set forth in Wipfli Financial’s current Form ADV Part 2A brochure and Form CRS, copies of which are available from Wipfli Financial upon request at no cost or at Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
Anthony Perillo

CFP® | Financial Advisor

Anthony Perillo, CFP®, is a Financial Advisor with Wipfli Financial Advisors in Milwaukee, WI. Anthony focuses on comprehensive financial planning for high-net-worth investors and families, and also specializes in tax-efficient investing strategies.

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Four dos and don’ts of 529 plans

time to read: 6 min