Frequently Asked Questions

Who may set up a 529 account?

Anyone can establish a 529 savings account, which would make that person the account custodian, and which would be established for the purpose of meeting the qualified education expenses of the individual designated beneficiary of the account, that is, the student or future student.

Any person can set up a 529 account and name anyone as the beneficiary, including a relative, a friend, or even the person (i.e., the custodian) who set up the account. There is no limit to the number of 529 accounts an individual can establish. In addition, a student, or future student, can be the designated beneficiary of more than one 529 account.

How much may I donate per year to a 529 account? Is it the same for college and K-12?

You can donate up to $15,000 per year ($30,000 if married filing jointly) beginning in tax year 2018 without incurring federal gift tax. Contributions of up $75,000 ($150,000 if married filing jointly) also may be treated as having been made over a five-year period, for federal gift tax purposes.

Federal law requires 529 plans to have overall limits. Accordingly, individual states have lifetime donation limits ranging from $235,000 to $500,000. In addition, most states offer state income tax deductions for annual donations up to $5,000 ($10,000 if married filing jointly).

Additional information on individual state 529 plans can be found at www.savingforcollege.com, which provides an interactive U.S. map where you can examine the features of each state’s plan.

My child decided to go into the military rather than college. Can I make a withdrawal from his account, which he doesn’t need anymore, to pay for the K-12 expenses of his younger brothers or sisters? What is involved?

You can rollover the unused amounts in a 529 plan to another family member of the original designated beneficiary, including a spouse, sibling, the spouse of a sibling, or any first cousin. Rollovers to a non-family member beneficiary would incur taxes and penalties.

If there is no other family member to rollover the 529 proceeds, some state plans allow them to be given the original beneficiary which would be subject to taxes.

Will the growth in my child’s 529 account be exempt from state taxes?

Every state plus D.C. exempts 529 account earnings growth from state taxation.

Nine states do not levy any individual income taxes at all; thus, the 529 earnings in these states also are not subject to state taxes. These states are: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming (which has no 529 plan).

The website www.savingforcollege.com has up to date information on the state tax breaks for 529 accounts in each state: here, which has an interactive map of the U.S. from which you can choose your individual state.

Although the federal government doesn’t provide a deduction or credit for my 529 contributions, does my state?

A total of 35 states plus D.C. provide a tax deduction or credit or matching grant for 529 contributions. The six states with an income tax that do not offer a tax deduction or credit for contributions nor a contribution matching grant are: California, Delaware, Hawaii, Kentucky, New Jersey and North Carolina.

A number of these states are reviewing whether such state deductions or credits will apply to contributions made for K-12 tuition expenses. You should check with your state tax department.

Are any withdrawals subject to penalties?

Yes, if used for ineligible expenses, for example, other than for eligible higher education expenses or tuition for elementary and secondary tuition. However, individual state plans likely will vary on their respective tax treatment for the use of 529 withdrawals for such K-12 tuition, as each state reacts to this recent change in federal tax law.

Withdrawals for non-eligible expenses, that is, non-qualified withdrawals, would transform the 529 account into a taxable investment and subject the account owner to taxes. In addition, if the state allowed for tax-deductible contributions, that portion of the non-qualified withdrawal would generally have to be reported as state “recapture” income.

Does the new law apply to children who are homeschooled?

No.

The initial language approved by the Senate (Dec. 2) and House (Dec. 19) included broader language offered by Senator Ted Cruz. This included a provision that 529 account savings can be withdrawn for expenses in connection with a homeschool.

However, Senate Democrats, led by Senators Bernie Sanders, Patti Murray, and Ron Wyden, filed a narrow procedural complaint concerning the issue with the Senate Parliamentarian that resulted in the homeschooling language being deleted in the final bill. Senate Democrats claimed the provision violated the obscure “Byrd Rule” which applies to bills passed under tax and budget “reconciliation” procedures.

https://www.wsj.com/livecoverage/tax-bill-2017/card/1513748902

Here is the deleted homeschooling language:

Expenses for:

(i) curriculum and curricular materials,

(ii) books or other instructional materials,

(iii) online educational materials,

(iv) tuition for tutoring or educational classes outside of the home (but only if the tutor or instructor is not related (within the meaning of section 152(d)(2)) to the student),

(v) dual enrollment in an institution of higher education, and

(vi) educational therapies for students with disabilities,

in connection with a homeschool (whether treated as a homeschool or a private school for purposes of applicable State law).’’.

Click here for Senator Ted Cruz’s speech chastising Senate Democrats for deleting the homeschooling language. https://www.youtube.com/watch?v=hMSbGNplIVI