The original purpose of 529 education savings plan accounts was to pay for college. And some people might assume that’s all they can be used for. But changes in the federal tax code have expanded how 529 plan accounts can be used. That has opened up opportunities to use them more creatively than one might think.
Absolute Funding Limits
To take full advantage of a 529 plan account, it might make sense to fully fund it. And there is no absolute dollar limit. Each state determines the lifetime contribution threshold for the 529 plans they sponsor. But those limits are very high – more than $200,000 in every state.[i]
Maximizing contributions to a 529 plan account may serve several purposes. The primary one is to ensure that the initial beneficiary has enough money available to cover whatever qualified education expenses come up between kindergarten and college. But there are many beyond that.
Using a 529 Plan Account After College Graduation
There are also ways assets in a 529 plan account can be used after the original beneficiary graduates from college.
- Money can be used to pay the original beneficiary’s tuition and qualified education expenses to attend graduate school (e.g., business school, medical school, law school).
- If the original beneficiary decides to attend a vocational or trade school after college, a 529 plan account could also be used. In addition to tuition, the plan’s assets may be available to cover some tools and equipment. This is also the case for apprenticeship programs registered with the federal Labor Department.
- The funds may also be used to pay down certain student loan debts of the original beneficiary or his or her siblings.
And all of these opportunities exist even if the original beneficiary doesn’t use them.
The person who set up the account can simply name another family member as beneficiary, whether or not the original student graduates from college.[ii]
Creative Uses of a 529 Plan Account
A significant feature of 529 plan accounts is that they never expire.[iii] This creates a lot of opportunities to use them creatively.
For example, it is possible that a single 529 plan account could be used to put a child through both college and graduate school. Any funds remaining in the account could be contributed to over time and then also potentially pay for a grandchild’s future education.
Since there is no federal limit on how many times the account’s beneficiary can change, it is also possible that the same account could be used for other education expenses before that grandchild attends college.
This opens up a wide range of creative possibilities. The account could be used to attend cooking classes at a local community college or maybe even a study-abroad program.
[i] Some states may impose annual contribution limits. Source: Saving for College, LLC website as of October 15, 2022.
[ii] Transfers to non-family members are treated as non-qualified distributions that may be subject to tax and penalties. Source: Internal Revenue Service website, 529 Plans: Questions and Answers as of October 15, 2022.
[iii] Check with a plan’s sponsor to see their specific rules, which may differ from state to state.