Keystone Financial Group

David R. Guttery, RFC, RFS, CAM
8178 Gadsden Highway, Suite 104
Trussville, AL 35173
Office: (205) 655-7526
Office Toll-Free: (800) 894-0065
Contact: Send an Email

Section 529 Plans were created under the Small Business Job Protection Act of 1996 for the purpose of allowing people a tax advantaged way to save for the higher education expenses of a beneficiary.

At a high level, the account is owned by one person, and a successor owner is also named. Usually, these are parents of a child who is the beneficiary of the account, however anyone can own a 529 plan for the benefit of a child. Anyone can make a contribution to the account for the beneficiary.

Deposits into 529 plans are considered gifts. Therefore, in 2019, any individual may make an annual gift of up to $15,000 per beneficiary. A donor may elect to contribute as much as $75,000 at one time, and claim five year forward averaging treatment of the gift. (As per the 2019 Internal Revenue Code). Maximum lifetime contribution limits vary by state, and in Alabama, the limit is $475,000.

Some states incentivize their residents to invest within the plan of their state by offering tax deduction against state income tax liability. There is no deduction to be had against Federal income tax liability when gifts are made to 529 plans. Investment growth compounds within such plans on a tax deferred basis. When the beneficiary incurs qualified expenses for education, the tax deferred gains are distributed on a tax free basis from the plan.

Normally, when money is distributed from a 529 plan, tax sheltered earnings and post tax contributions are distributed proportionately. If such funds were distributed for anything other than qualified educational expenses, then a 10% penalty would apply to the tax deferred portion of the distribution, along with a liability of income taxation. However, a distribution can be made from a 529 plan up to the amount of a tax free scholarship, without paying the 10% penalty.

Anyone may use the 529 plan of any state, regardless of residency. In such cases, you wouldn’t enjoy resident state deductibility that may have been available with a home state plan. That isn’t the only factor to consider though. I have many clients who have gravitated to out of state plans for other reasons that were pertinent to them.

We examine the number of fund offerings, both actively and passively managed. We evaluate age weighted glide path funds, and quantifiable metrics from sources like Morningstar for insight into the performance of the funds, volatility of the funds, consistency of management and expense. There are many factors to evaluate when gauging the efficacy of a 529 plan other than simply an in state tax benefit.

In the event that a residual balance remains after graduation, such balances can be transferred into the plans of siblings, or the account can remain open and the beneficiary designation changed to another person. Sometimes, parents consider keeping the account open until the original beneficiary has children of their own, and then they change the beneficiary to reflect the grandchild. Sometimes, the original beneficiary goes back to school later in life to pursue a higher degree. I’ve even seen cases where the donor parent changed the beneficiary to reflect himself as he went back to culinary school later in life. The bottom line is many options are open to account owners when surplus funds remain in a 529 plan account.