Confused about 529 College Savings Plans?

Posted by Judy Anne Cavey on Oct 26, 2011 in , , | No Comments

According to the Financial Research Corporation, families contributed 75% more in 2010 than in 2008 to these plans.

According to the article by Deborah L. Jacobs, “Collegiate Confusion”, featured in Forbes magazine, “The main appeal of a 529 is income tax savings. You put money in one of these plans and you don’t have to pay federal or state income tax on the earnings, provided the cash is withdrawn to pay for college or graduate school tuition, fees, room and board, or books. In some cases you also get a state income tax deduction for your contribution.” However, there’s more to these plans that you’ll need to be aware of.

In Emergencies

The 529′s are flexible, in that they are not considered a part of your parents or grandparents taxable estate. That’s good news for families finding themselves in bad situations. Why? If one or both parents lose their jobs, they’d be able to use the funds to pay living expenses. According to lawyer Susan T. Bart in Chicago, if your parents need to use the money, they simply name themselves as “owners”. Then, when things improve, the money left may be converted back into the students name.

These plans also allow beneficiaries to be switched from one sibling to another. Let’s say your brother decides to quit graduate school to become a monk, leaving a hefty sum still in the plan your grandparents put aside in his name. You’ve just received a notice that tuition will increase 35% (as many students have), something you hadn’t counted on. The grandparents may then have your name placed on your brother’s plan.

The Easy Way Gets Complicated

529′s are a “convenient and the easy way” to provide for an education, compared with a trust, states Carlyn S. McCaffrey, an attorney in New York.

Something students and grandparents should be aware of is the Free Application for Federal Student Aid (FAFSA) doesn’t ask if grandparents own 529′s, but the distribution from that account for tuition counts as income on the following year’s FAFSA.

250 private colleges use the College Board’s Profile form to give their own discounts or aid. The form requires the student report any 529 savings plans that name them as beneficiary–not owned by parents. Inclusion of a grandparents 529 might have an impact on the student’s eligibility for any discounts or aid.

Plan Ahead

What if your parents and grandparents have set up separate 529′s and unfortunately, your grandparents die before you go to school or finish school? They should name each other as successor and then one of your parents.

If no successor is named, it depends on the state’s 529 plan what will happen next. Some allow the beneficiary, if over 18, to become the successor. Or it could be the executor of the estate of the person who has died. Either way, it’s best to find out how it all works in your state.


The Uniform Transfers to Minors Act (UTMA) can be converted to a 529, and the experts seem to agree it would be a good idea to do so, for extra income tax savings. If your parents have put college savings into a UTMA, and haven’t switched to a 529, you might want to suggest it. Be sure they know it would go into a “custodial 529″, suggests Ms. Bart.

Here’s a catch, Ms. Jacobs article states 529′s can only be funded with cash, they will have to liquidate the UTMA first, then fund the 529, and that could mean paying tax on the gains.

For more information about 529′s, see Saving for College. And of course, it’s always best to contact a professional regarding any changes to the specifics discussed here before taking action.


If you found this blog interesting or helpful, re-tweets and sharing are appreciated!