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Doing Your Homework on 529 College Savings Plans

Doing Your Homework on 529 College Savings Plans

February 08, 2022

If you are the parent of an infant or toddler, it’s likely you have your hands full with a laser focus on the here and now. That’s completely understandable and, ultimately, could put you behind the 8-ball when it comes to developing a college savings plan. Higher education costs are almost certain to escalate in the years ahead. The sooner you begin building a funding portfolio, the better for you and your child. So, where should you start? One approach is a 529 college savings plan; however, it’s important to weigh the pros and cons of it to determine if it’s the approach to consider for your circumstance.

What is a 529 Plan?

A 529 college savings plan enables someone interested in saving for a child’s education – yourself or another family member for instance - (or other individuals, e.g., grandparents) to do so on a tax-advantaged basis. Savings accrued in a 529 plan aren’t subject to taxation and can be withdrawn to pay for a qualified academic institution.

What are the Benefits of a 529 Plan?

One benefit is tax-free earnings growth on funds used to pay for a qualified college, university, or graduate school. This includes 2-year programs, trade schools, and vocational schools at home and abroad. Moreover, unused funds can transfer to another related beneficiary and be used for their qualified higher education expenses. Plan holders always have access to the basis and contributions tax-free and without penalty. 

Five-year gift tax averaging is another key benefit of 529 college savings plans.  This allows plan holders to contribute 5x as much money into the plan in a single year. Contributions are treated as though they were spread evenly over a five-year period starting with the current calendar year.  The lump sum contribution will use all or part of the annual gift tax exclusion for the beneficiary during the five-year period. 

For example, a grandparent can give up to $75,000 in 2021 as a lump sum to each grandchild without having to pay gift taxes, based on the $15,000 annual gift tax exclusion.  The grandmother and grandfather can jointly give up to $150,000 to each grandchild; however, the grandparents will be unable to give any more money to each grandchild over the next five years.         

What are Disadvantages of a 529 Plan?

Plan beneficiaries may experience limitations to financial aid availability. For instance, if a plan beneficiary receives a scholarship, this may result in funds being left in the plan. This may trigger penalties and taxation. Gains inside the plan are subject to a 10% penalty and are subject to income tax. One positive caveat to financial aid limitations is that said reductions are moot when the plan holder is a grandparent or a non-parental relation.

It’s important to understand that a 529 college savings plan is an investment; therefore, investment options may also face restrictions with limits on how many times you can adjust or change your investment.

Additional Options for College Savings

529 plans are not the be all and end all for funding higher education. Traditional savings plans and whole life insurance are additional approaches. Though the primary function of whole life insurance is the death benefit, the cash value accrued within policy can be withdrawn generally tax-free and for any purpose. Also, federal student aid does not calculate cash value when assessing a package.

Is a 529 Plan Something for You to Consider?

Short answer? It depends. There are definite benefits and considerations to mull over. Simply put, a 529 plan – and any college savings approach – may not make sense for a high schooler. It’s best to start saving when your child is still young. Next time you put your child down for a short nap, take steps to think long-term and do your homework on college savings.


Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice. Investors should consider the investment objectives, risks, charges and expenses of a 529 plan carefully before investing. This and other information are contained in the Program Description, which may be obtained from your investment professional. Please read it before you invest.

Gregory Campanile is a Registered Representative and Financial Advisor of Park Avenue Securities (PAS). OSJ:  1040 BROAD STREET 2ND FLOOR, SUITE 202, SHREWSBURY, NJ 07702, 973-244-4420. .  Securities products and advisory services offered through Park Avenue Securities LLC (PAS), member FINRA, SIPC.. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. International Planning Alliance, LLC is not an affiliate or subsidiary of PAS or Guardian.

2021-130596 Exp. 12/23