I have helped several families open 529 plans now and these are answers to 15 529 plan questions I get most often.

The hardest part of a 529 plan is opening it. Hope this frequently asked questions post helps you get that 529 plan open!

1. Should I open a 529 plan with my financial advisor or a broker-sold 529 savings plan?

Neither! Most broker-sold 529 plans are super expensive and are not even worth opening. Instead, open a direct-sold self-directed 529 plan. The Moneyaire’s prefer the Illinois Bright Start Direct-Sold College Savings Program.

The Illinois Bright Start Direct-Sold College Savings Program could be the right plan for if you reside in Illinois OR a state:

• That allows you to receive a state tax credit or deduction from any plan.
• Without an income tax.
• That doesn’t offer a tax benefit for 529 contributions.

Check out this post on the Moneyaire preferred 529 plan.

2. Does the money in a 529 plan count against my child’s FAFSA?

Yes, and only at a max of 5.64% if the account is owned by a custodial parent. This means that for every $10k saved for college, the beneficiary’s aid will be reduced by $564.

If the 529 plan owner is a non-custodial parent, relative (not including grandparents) or friend, then the FAFSA consequences are much higher. The withdrawals from these 529 plans can impact financial aid by up to 50% the following year. This Forbes article goes into the details on this. Starting with the 2024-2025 school year grandparent owned 529 plan distributions will no longer count against financial aid calculations.

I recommend that the owner of the 529 Plan be a custodial parent, grandparent or the student to avoid expensive adverse financial aid consequences. Relatives and friends can always contribute to 529 Plans even if they don’t own the account. Mrs. Moneyaire explains how to make gift contributions for an Illinois Bright Start Direct-Sold College Savings Program here.

3. What if my child doesn’t go to college?

It’s hard to predict the future, especially the future decisions your child may make. Even if your child doesn’t go to college they may still want to go on to another higher educational institution. Money is a 529 Plan can also pay for technical/trade school or apprenticeship programs. If your child does not want to take the higher education route, you can now rollover up to $35,000 into a Roth IRA.

If you still have funds in the account after the rollover, you still have options. You can still withdraw the money for non-educational purposes. The account owner will just need to pay ordinary income tax plus a 10% penalty on the gains. Contributions are not subject to tax or penalties upon withdrawal. You may also be responsible for repaying “recapture” or state income or state penalties depending on your state.

If your child doesn’t want to pursue higher education, don’t worry.

The taxes and penalties are not that bad.

If invested correctly, the gains will make up for the taxes and penalties you’ll pay for non-educational related withdrawals.

For example, if you contribute $1,000 a year and realize a 7% gain each year for 18 years, your child’s 529 plan will have about $36,000 in the account. $18,000 of the $36,000 would be your basis and would be excluded from being taxed or penalized. If you withdraw the full $36,000 for non-educational purposes you’ll pay about $5,100 in federal income tax (assuming a 28% effective rate) and about $1,800 in penalties. Depending on your state, you may have to pay some recapture fees for the state tax benefit you received and/or pay state income tax on various portions of unqualified withdrawals. For example, California imposes a 2.5% fee on the gains portion of your withdrawal.

If we lived in California, made unqualified withdrawals of $36k, you’d still walk away with around $10,550 in gains or about $28,550 overall (California would penalize you 2.5% of your profit or $450).

Paying the penalties, taxes and recapture is painful. However, being unprepared to pay for college would be extremely burdensome on your child or your family.

Some other options for 529 Plan Money:

• Change the beneficiary to another child or save it for grandchildren.
• Name yourself beneficiary and take classes to further your own education, a hobby or vocational training. You can use 529 Plan money as long as the institution you are attending is eligible. The money can also go towards room and board if you’re in a degree or certificate program and enrolled at least half time.

4. Does my state offer a tax deduction or credit for 529 plan contributions?

Here is a list of states that have an income tax that DO NOT offer a tax benefit for 529 plan contributions:

• California
• Delaware
• Hawaii
• Kentucky
• Maine
• New Jersey
• North Carolina

Since the states above don’t offer an incentive to use their state plan, you have the opportunity to select plans from other states. The Moneyaires like the Illinois Bright Start Direct-Sold College Savings Program. Check out this post that goes into details about it.

5. Do I have to use my state’s 529 plan to get a tax deduction or credit for contributions?

Many states require you to use a state plan in order to get a state tax benefit. The following states give you a tax benefit for any 529 plan contributions, even if it’s not the state’s plan:

• Arizona
• Arkansas
• Kansas
• Minnesota
• Missouri
• Montana 
• Pennsylvania

If you are shopping around for a 529 Plan, consider the Illinois Bright Start Direct-Sold College Savings Program. It has a low .06% management fee on the account and there are several low cost index funds you can opt into or age-based plans.

6. My state doesn’t have a state income tax or doesn’t give a tax benefit for 529 contributions; should I still open and contribute to a 529 plan?

Yes! Money in a 529 plan will grow tax free and you’ll be able to withdraw it tax free for higher education and other related expenses. The tax benefit is nice, but it’s not the end game or a significant amount. Don’t worry if you aren’t getting the opportunity to claim contributions as a deduction or credit on state taxes. Since you don’t receive a benefit for using a plan specific to your state, consider the Illinois Bright Start Direct-Sold College Savings Program. You will definitely want to pay as little as possible in fees.

7. What can I use the money in my 529 plan for without incurring a tax consequence?

• Tuition for college, university, trade school and apprenticeship programs
• A maximum of $10,000 in annual tuition expenses per student for K to 12 education at a public, private, or religious school
• Room & Board
• Fees, school supplies, including computers, software, and other supplies/equipment and internet access
• Books
• Up to $10,000 can be used towards student loans per beneficiary (the $10k is a lifetime benefit).
• Up to $35,000 can now be rolled over into a Roth IRA tax and penalty free.

8. What should I do with leftover money in a 529 plan?

• Up to $35,000 can now be rolled over into a Roth IRA tax and penalty free.
• Contributions can be withdrawn tax and penalty free. Say what?! 529s are after tax tax advantaged accounts. When a contribution is made to a 529, its with after tax money. This means that money can be withdrawn without penalty or without paying taxes on it. HOWEVER, the gains in your 529 plan are subject to a 10% penalty plus ordinary income tax when withdrawn for non-educational expenses (and whatever your state may impose). You can then use this money for any purpose after withdrawing and paying the tax and penalty.
• Save the money in the account towards another child’s or person’s education by changing the beneficiary. You can even make yourself the beneficiary and take some fun classes!

9. Who should be the owner of the 529 plan and who should be the beneficiary?

The custodial parent or student should be the account owner for the best financial aid treatment. The Moneyaires list Mrs. Moneyaire as the account owner and Baby Moneyaire as the beneficiary. Non-custodial parents or other relatives or friends can also be the owner but beware of the financial aid consequences which could count against FAFSA by 50%.

10. Should I open up a separate 529 plan for each child?

Yes! A 529 plan cannot have multiple beneficiaries. The Secure Act 2.0 now allows $35,000 to be rolled over to the beneficiary’s Roth IRA. HOWEVER, the 529 account has to have been in the beneficiary’s name for 15 years. You could potentially reset the timer on this if you change the beneficiary in your account. It will be more work to manage multiple accounts, but will be simpler to use the accounts to pay for school later on or for rollovers later.

You’ll also want separate accounts if your kids won’t overlap going to college. When you have a child attending college, you may want to move to a more conservative mix to avoid market losses in the account. This would dampen the growth on the account for the child/children coming up to use the funds next.

Some families want one account to manage. This keeps things simple in the years leading up to college. They’ll then have to go through a process to of change the beneficiary to pay for each child’s expenses. If you have left over funds, it’ll be harder to perform rollovers to Roths. It’s all dependent on what will work best for your family.

Mrs. Moneyaire likes separate accounts for each child. I like the opportunity to track each child’s college plan and to keep things equal and fair. When the time comes to withdraw we want to 1) keeps things simple, 2) want to keep things fair between the kids. Although changing beneficiaries can be done, it’s an extra administrative step that needs to happen. We anticipate it’ll be a busy time when children go off to college. We want to keep things as easy as possible at that time.

11. I opened a 529 Plan. What should I invest my child’s 529 plan in?

Mrs. Moneyaire suggests investing in a low fee age-based fund. The fund you invest in should preferably have a net expense ratio of .25% or less. Avoid anything with an expense ratio of .51% or higher. If you want to have more control over your investments or want to be more aggressive invest in a low fee funds that index the whole US stock market or the S&P 500. That way the money in a 529 plan will grow with the US market or a subset of it. Over the long run, the US stock market has grown and if you have a long timeline (more than 10 years) until you need to tap this money, investing in the stock market is a great option to really grow the investment.

If you select an aged based fund in the Illinois Bright Start 529 plan, you’ll have three options to select from if you choose the Vanguard age based option: aggressive, moderate or conservative. After selecting your risk tolerance, your funds will be invested into the correct age based fund based on the birthdate of your beneficiary.

You can also read this post to see how Mrs. Moneyaire has invested Baby Moneyaire’s 529 plan. The Moneyaires self-manage baby Moneyaire’s account with a mix of fund options including investing in a REIT, the international market, an index fund that tracks the S&P 500 etc.

12. Should I invest in my kid’s 529 Plan or towards my own retirement?

Just like the emergency directions in an airplane, put your mask on first before helping your kids. You can take out loans for college/trade school/university etc. but there are no loans for retirement. Always, always set yourself up first before saving for your kid’s college. You should be investing, at a minimum, up to the company match in your company (school, government etc.) sponsored retirement account (401k, 403b etc.). The Moneyaires direct upwards of 30% of their incomes towards retirement. This is high because our goals are to be financially independent and to give ourselves the option to retire early.

Baby Moneyaire’s 529 Plan is funded every month with an auto draft from our checking account. We devote a small fraction – about 2% – of our income to baby Moneyaire’s educational fund.

Generous family and friends also contribute to Baby Moneyaire’s 529 plan. When family or friends ask what they can get Baby Moneyaire, we often suggest a contribution to her 529 plan. You can read up more on asking for 529 contributions here.

13. What happens to the money in my 529 plan if my child receives a scholarship?

If your child receives scholarship money you will be able to withdraw the value of the scholarship amount from your 529 plan penalty-free! You will, however, have to pay taxes on the profits. Even if you have a well-funded 529 plan, you should still encourage your kid(s) to apply for scholarship money. 529 money can also be used towards graduate studies, certificate programs or classes at an eligible institution, including community college.

Also, you can change the beneficiary to another child or save it for grandchildren. You can also name the beneficiary to yourself and take classes to further your own education, a hobby or vocational training as long as the institution you are attending is eligible. The only catch is that room and board can’t be paid for unless you’re enrolled at least half time and are pursuing a certificate or degree program.

14. If I open an Illinois Bright Start Direct-Sold College Savings Program, does my child have to attend college/university/trade school/an apprenticeship program in Illinois?

No – they can pursue higher education in any state or aboard. The institution, however, must be deemed eligible by the federal government. Check to see if the institution you are interested in qualifies by clicking here.

15. What about the Nevada, Vanguard or Utah Plan? Aren’t they the “Best”?

The Nevada Plan also the Vanguard 529 Plan is a good option. It’s got a Silver rating from Morningstar. However, the fees charged on the Vanguard Plan are still higher than the Illinois Bright Start Plan. This plan has a .11% program fee (compare that with the Illinois Bright Start Program Fee of .06%). Also, Nevada residents need a minimum 1st time contribution of $1,000 and non-residents $3,000 or $50 through an employer automatic investment plan. Further, you have to contribute a minimum of $50 at a time. The Illinois Plan doesn’t have these minimum contribution limitations. You can get started with just $20. I personally am not a fan of the Nevada/Vanguard plan because of the barrier to entry regarding minimums.

The Utah Plan is also a great option. However, the fees, for the most part, are still slightly cheaper with the Illinois Bright Start Plan. Utah’s plan has an administrative fee of .10 to .14% in addition to the fund fees you’ll have to pay.

Go Open That 529 Plan!

I hope this FAQ has been helpful and that you’re now ready to open an account. Read this post on how to open an account.

Have an additional question I didn’t address? Please ask it in the comments below.

Good Luck!

Mrs. Moneyaire