529 Plans: They’re Not Just for College Anymore

by  Robert J. Emens, GW & WADE PRINCIPAL

Have you heard about the recent changes to 529 education plans? The benefits under 529 plans have expanded for 2018, and beyond. Now parents and grandparents are in a better position to help their children plan ahead for education expenses and potentially lower their taxable estate. 

The new tax law provides good news for families with hefty private school tuition bills. Beginning in 2018, up to $10,000 of funds in a 529 plan can be used for qualifying K-12 private educational expenses without triggering any federal tax consequences. So far, a few states have also adopted legislation to conform to the federal rule change. Prior to this change, 529 plans could only be used to cover post-high school expenses. Check with your advisor to determine the specific details of your state’s plan. 

In addition, for families with disabled children, a 529 plan can now be rolled over to an Achieving a Better Life Experience (ABLE) plan without federal tax implications. ABLE plans are tax-advantaged accounts that help families pay for certain disability-related expenses. For families facing expensive medical-related costs for their disabled children, this change may offer some welcome relief. 

How to Take Full Advantage of a 529 Plan

As of 2018, each year a parent or grandparent can put up to $15,000 in a child’s 529 plan to remain under the annual gift tax exclusion. This means that a married couple could contribute $30,000 per year toward a child’s or grandchild’s education.

For the very affluent, one way to optimize 529 plan benefits is for both sets of grandparents to front-load five years of 529 contributions, ideally as soon as the child has a social security number. When they front-load, each set of grandparents can contribute $150,000 — for a total of up to $300,000 if both sets of grandparents make maximum contributions — very early in the child’s life. 

The main benefit of front-loading is the potential to generate additional tax-free growth by immediately putting an additional five years of future contributions to work earning investment returns. Even if you start taking distributions from the 529 plan to pay for kindergarten tuition, depending on market performance, you may still have a substantial amount of growth in a five-year span. 

It's important to be aware of state-set 529 plan balance limits. For example, in Massachusetts this limit is $400,000[1] and in California the limit is $475,000[2].

Finally, you should note that every state has a 529 plan, but the plans typically are open to participation by both in-state and out-of-state residents. You should consider whether there are any additional state tax benefits offered by your home state for participating in its 529 plan. For example, through at least the 2021 tax year, Massachusetts allows a joint-filing couple to deduct up to $2,000 ($1,000 for a single-filer) per year of contributions made to a Massachusetts 529 plan on their state income tax return.  

529 Plans and Direct Tuition Payments as an Estate Planning Tool

If you’re an affluent grandparent with a taxable estate, gifting your grandchildren with 529 contributions can dramatically lower your estate tax. For example, for a grandparent with a net worth greater than $22 million, front-loading one grandchild’s 529 plan with a $150,000 contribution could technically save $67,500 in federal estate taxes, assuming a tax rate of 45%. If you multiply this by 10 grandchildren, for example, you’ve just saved over half a million dollars. 

Grandparents who want to do even more can fully fund 529 plans and also pay the education provider directly when the tuition bill comes due. Because educational expenses are considered a familial obligation, paying for school is not a taxable gift to a child. 

Paying the provider directly further reduces the size of a grandparent’s taxable estate. And if the grandparent pays the education expense all the way through, the fully funded 529 plans can go untouched by the grandchildren and be passed to their children, continuing the education legacy the grandparents started. 

Setting Up a 529 Plan the Right Way

For a variety of reasons, sometimes grandparents choose to set up 529 plans in their own names. We’ve seen this done in situations where the grandparents are more affluent than their children, and there’s a chance the family may qualify for financial aid. Each situation needs to be viewed individually. That’s why it’s often useful to have the family’s wealth advisor involved in these decisions. 

Also, one thing most families don’t know is that there are two types of 529 plans. The first type, called a “contributory account,” the account owner (usually the parent or grandparent) controls all decisions related to the account. The second type, called a “custodian account,” is controlled by the beneficiary, which automatically becomes the child’s account to manage at age 18. At this point, the child could choose to pay the tuition or, they could pay the penalty and use the funds to buy a sports car. 

It’s important to know which type of 529 plan you have, because no matter which 529 provider you choose, all plans offer contributory and custodial options. It’s important to set it up correctly at the outset because you’re not permitted to change in the future. We usually recommend that our clients create contributory accounts, so they keep the authority to make changes to the account throughout their life and include it in their estate plans as appropriate. 

Tax benefits aside, it’s important to keep in mind the value that 529 plans provide to children, grandchildren or future generations. 529 plans present an opportunity to provide a tremendous gift to children and grandchildren. And at the end of the day, one of the most valuable things we can give our kids is a great education. 

Did you know that 529 plans are not limited to 
parents and grandparents? An aunt, friend or
anyone can open and/or contribute to a 529 Plan. 

Want to learn more about the ins and outs of 529 plans? Contact us anytime. And check out our blog for other financial tips and advice. 

estate planning

The information provided above is general in nature and is not intended to represent specific investment or professional advice. Tax laws are complex and subject to change. GW & Wade cannot guarantee that the information presented above is accurate, complete, or timely. No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from GW & Wade, LLC, which can only be provided through a formal advisory relationship.   

Clients of the firm who have specific questions should contact their GW & Wade Counselor. All other inquiries, including a potential advisory relationship with GW & Wade, should be directed to: 

Laurie Gerber, Client Development
GW & Wade, LLC


[1] https://smartasset.com/college-savings-plans/massachusetts-529-plans 

[2] https://smartasset.com/investing/529-plan-contribution-limits


Robert J. Emens



Tax Considerations For An Equity Exit

Register Now
David Brodsky
Kelli Adams