Our Top 529 Plan Tips, Hacks, And Uses

A 529 plan is an investment account that is designed to pay for educational expenses including primary and secondary private education or post-secondary (college) expenses. The money you put into a 529 plan grows tax-free (while it is in the account), and can be used tax-free for qualified educational expenses.

The first 529 plan, introduced in 1986, was a prepaid tuition plan. But soon the program expanded to include college savings plans. College savings plans offer a lot more flexibility than prepaid tuition plans in that the funds can be used to pay for education costs at any eligible school rather than just schools that are located in your state.

If you've opened a 529 plan, you're already ahead of the curve when it comes to preparing for your child's education. But by taking advantage of a few key 529 plan tips, you may be to get even more value out of your plan. These are our best 529 plan tips and tricks to maximize your benefits.

Note: Be sure to check out our full 529 Plan Guide here and find your state >>

1. Take State 529 Tax Deductions During The College Years

For many parents, saving for their child's higher education costs can be a real challenge. But one the more surprising 529 plan tips is that you may still be able to take advantage of one even if your parents weren't able to open an account for you before you started college. Many states offer a tax deduction on money contributed to a 529 plan regardless of when the money is contributed.

If your state offers a deduction on up to $6,000 of income, contribute $6,000 of income (you may even be able to use the proceeds of student loans) to the 529 for each year you’re in college. Then immediately use the money to pay for your tuition or other qualified expenses. This trick can be especially useful for graduate students who may qualify to contribute income from internships to the 529 plans.

Note: depending on your state, this can also work for K-12 expenses and even student loans. Use tax-free money if you can!

Related: How To Save For College: The Order Of Operations Parents Should Follow

2. Contribute Up To Five Years At Once

In general, parents can contribute up to $16,000 to a 529 plan each year. But there is one wrinkle in that rule. You can contribute up to 5 years worth of contributions ($80,000) all at once. See the full guidelines to the529 plan contribution limits.

Parents who receive an inheritance or another major windfall may want to take advantage of this loophole to contribute a lot of money early in a child’s life. That way, the money in the account can grow and compound for more than a decade and a half before the child needs it to attend college.

Note: Some states that offer tax deductions may not allow for a tax deduction if you super-fund. Make sure you check and see if your state allows for super-funding and your tax deduction. Find your state in our Ultimate 529 Plan Guide to see if you're able to.

Related: How Much Should You Have In A 529 Plan By Age?

3. Change The Beneficiary

When you create a 529 plan, you designate a beneficiary. However, one of the 529 plan tips that everyone should know is that the funds don't have to be given to that specific beneficiary. If you’ve got multiple children, you can change the beneficiary to another child if one child decides to forgo college.

If all your kids turn out to be athletic all-stars who earn full rides to college, the funds in the 529 don’t need to go to waste. You can transfer funds to any member of your immediate family including yourself.

While it may seem crazy to designate yourself as a beneficiary, there are plenty of legitimate educational expenses that people nearing retirement may want to consider. For example, certain culinary schools, foreign language schools, and a variety of training programs qualify as educational expenses.

Also, you could simply end up saving the money and using it for grandchildren in the future.

4. Pick The 529 With The Best Features

If you happen to live in a state that offers a tax deduction for contributions to its 529 plan, then choosing your state's plan is one of the more obvious, but still valuable, 529 plan tips for you. Here's how to find out if your state offers a 529 plan deduction.

Some states, however, don’t don’t offer a tax deduction when you contribute to a 529 account. Other states offer a tax deduction even if you choose a 529 plan outside of your state (this is called tax parity). The states that offer tax parity (as of right now) include: Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania.

If you live in a state in either category, there’s no reason to pick a 529 plan in your state. Instead, it may make more sense to open a 529 account at a brokerage that offers a combination of the lowest fees and best investment options. These are the best brokers to open a 529 plan.

5. Use The 529 Plan For K-12 Tuition

If you live in a state with a 529 tax deduction, and you’re paying for private school, you can put up to $16,000 per child, per year into a 529 plan account. This is one of the most underutilized 529 plan tips that more parents should be taking advantage of. However, if your state allows it, you can only use $10,000 per year for K-12 tuition.

If you spend that much on private education each year, you should claim the state tax deduction in your state. The amount you can deduct from your state income taxes varies by state, but this is a tax break that parents should not overlook.

Note: Some states don't allow for this, so make sure you check your state's plan. Find your state in our Ultimate 529 Plan Guide to see if you're able to.

Bonus: Use The 529 Plan For Student Loan Debt

Starting in 2019, you are now eligible to withdraw up to $10,000 tax-free for qualified education loan payments (i.e. student loans).

It's important to note, if you pay a student loan with 529 plan money, student loan interest paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction.

There is also a $10,000 lifetime limit that applies to the 529 plan beneficiary and each of their siblings. So, one child - $10,000 max. Two children, $10,000 each - so $20,000 max.

Note: Some states don't allow for this, so make sure you check your state's plan. Find your state in our Ultimate 529 Plan Guide to see if you're able to.

Final Thoughts

Now that you know the top 529 plan tips, the bigger question may be how you should go about funding your child's plan. Saving for your child's college education can be tough. But there are tools and strategies that can help you reach your 529 plan savings goals.

One idea would be to ask friends and family to "gift" contributions to your child's 529 plan during birthdays and holidays. Another strategy would be to set up automatic transfers to your 529 plan so that it just feels like another monthly bill. 

If you're looking for tools to help, Backer and UNest are two platforms that make it easy to set up automatic 529 plan contributions and to receive gifts from family and friends. Or if you'd like to open a 529 plan with a traditional broker, these are the ones that have the best 529 plan options.