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  • Writer's pictureBrenden Leese, CFP®

Are You Taking Full Advantage of Your 529 Plan?

Updated: May 26, 2022

Part two of our series in honor of National 529 Day, here are some things you may not know about 529 plans.

As discussed in Part 1 of this post, 529 plans offer families tremendous flexibility and tax-advantage savings opportunity to help combat the ever-rising cost of college tuition. Here we’ll discuss 529 investment timing and strategies, asset allocation, contribution limits and whether you are limited to your home state’s plan. Key Takeaways

  • Yes, there are limits to how much you can save in a 529. But the ceiling is high and there are plenty of legal workarounds.

  • Find out why it can make sense to keep contributing to a 529 account even after a child starts college.

  • Don’t worry. In most cases, having a 529 plan for your child will not impede their financial aid opportunities.

This topic always generates a lot of feedback from our clients and followers. Here are answer to many of the frequently asked questions we receive.

Are there annual limits to how much I can contribute to a 529 plan?

There are no annual contribution limits on the amount you can contribute to a 529 plan. Just know that contributions do count as gifts for gift-tax purposes. Contributions beyond the annual gift tax exclusion may be subject to gift taxes. In 2021, individuals can contribute up to $15,000 per beneficiary ($30,000 for gifts from a married couple) without using up part of their lifetime gift tax exemption (currently $11.7 million) which would lead to having to pay gift taxes or file a gift tax return.  Also, 529s have a special five-year gift tax averaging rule, which lets you make a lump sum contribution amounting to five times the annual gift tax exclusion per beneficiary and have it treated as though it were given over a five-year period. This allows an individual to give up to $75,000 ($150,000 for gifts from a married couple) tax-free in a lump sum.

Is there any lifetime limit to how much I can sock away in a 529 plan?

529 plans have an aggregate limit that ranges from $235,000 to $529,000, depending on the state sponsoring your plan. That should be enough to fund four years of tuition at most U.S. universities. Once the 529 plan’s account balance exceeds this limit, no more contributions may be made to the 529 plan, but earnings may continue to accumulate. Also, you can work around this aggregate limit by opening a 529 plan in another state. 

Can I keep making contributions once my child starts college?

You can continue to make contributions once your child starts college. It depends on your situation as far as funding goal and capacity to do so. We would work out the numbers in the planning process to see if that option is necessary or even makes sense given your goals. It makes sense for some families to do so because the contributions continue to grow tax-free and it could be four, five, or even more years before their student finishes school, especially if graduate school is in the picture.

Do I have to invest in my home state’s 529 plan?

No. In fact, we move many of our new clients over to different plans that offer lower expenses than plans here in the tri-state region--with a greater menu of investment options. It is important to find the plan that best fits your needs. While New York and Connecticut permit residents using their home-state’s 529 plan to deduct up to $10,000 a year (married/joint) from their state income tax calculation, New Jersey does not. However, it is important to make the comparisons to see if the benefits outweigh the costs in these instances.

If my child graduates from college with funds left over in their account, what happens to that money?

The leftover funds can remain invested in the 529 account and the owner can then change the beneficiary to another child, to a future grandchild, or to another qualifying family member. You can also withdraw the leftover funds, but this will be counted as a nonqualified distribution, and you will have to pay tax on the gains in the account--plus a 10% penalty.

Are there any penalties for withdrawing funds before my child starts college?

No, as long as the funds are used for qualified education expenses. The earnings in the account are subject to income tax and a 10% penalty (aside from some instances) if used for a nonqualified expense. State benefits could be also subject to recapture.

How aggressive should I be with investments in my child’s 529 plan?

Most 529 plans allow you to invest your contributions in a variety of conservative, aggressive and blended portfolios and change your asset allocation at least once or twice per year. Most 529 plans offer target date investment options that start out with an aggressive growth portfolio when your child is young and then get increasingly conservative as your child nears college age. Target date funds re-set automatically, so the recommended asset allocation is already done for you.

Will the savings in my 529 plan count against my child’s financial aid/scholarship opportunities?

We get this question all the time. According to, the value of a 529 plan owned by a dependent student or one of their parents (529 plans do not allow joint ownership) is considered a parent asset on the commonly used Free Application for Federal Student Aid (FAFSA) form. The first $10,000 will fall under the Asset Protection Allowance (the exact amount depends on the older parent’s age), noted Any parental assets beyond that amount will reduce a student’s aid package by up to a maximum of 5.64% of the asset’s value.

So, if a parent’s 529 account exceeds the Asset Protection Allowance by $25,000, his child’s financial aid award could be reduced by as much as $1,410. Of course, no one wants to lose $1,410, but the tax-free investment gains of you 529 account will be more than enough to compensate you for this modest hit.

Just know that several hundred highly selective, mostly private universities will also ask families to complete the more extensive CSS Profile. In general, more of a family’s assets are included on the CSS including money in a grandparent-owned 529 plan--which are not reported on the FAFSA. Again, the significant tax-free accumulation and drawdown of funds in a 529 plan will usually outweigh any reductions in potential financial aid. “The best math lesson we can teach college students this year is to subtract a tuition increase and benefit from the dividends of higher education.” -- Jodi Rell, former governor of Connecticut


As summer heats up and masks gradually come off, many families will start looking toward the future and in-person school will be back in session before you know it. If you or someone close to you has concerns about college savings for your children or grandchildren, please don’t hesitate to reach out. We’re happy to help.

BRENDEN LEESE is a Paraplanner at Novi Wealth


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