School Is in Session: 529 Plan Refresher

Castlepoint Blog: Education Saving Vehicles & Education Funding, Kristen Buchman
October 12, 2022

“Education is the most powerful weapon which you can use to change the world,”

Nelson Mandela1

Another year of school is in session, which is often a reminder to revisit the different avenues for education savings. There are many vehicles for college savings, but 529 savings plans offer the most advantageous tax benefits for education planning. 

A quick refresher: A 529 plan is an investment account established for a beneficiary that offers tax benefits when used for qualified education expenses. Examples of qualified education expenses include college tuition and fees, books and materials, room and board, computers and related equipment or services.2 This list has recently been expanded to include expenses beyond college, such as K-12 tuition expenses and student loan repayment.3 As you may imagine, there are guidelines and limitations on some of these expenses, so be sure to consult with your advisory team as it relates to your personal situation. 

It’s important that expenses are deemed “qualified” to maintain the tax benefits of a 529 plan. The funds within the account grow tax-deferred, and withdrawals are tax-free if the funds are used for qualified education expenses.4 If the funds are withdrawn and used for other purposes, there would be income tax and a penalty due on the earnings associated with the withdrawal. Like other rules, there are a few exceptions for which the penalty is waived. 

Another tax benefit that may be available is a state income tax deduction on contributions. This varies from state to state. In Oklahoma, individual taxpayers are eligible to deduct up to $10,000 (taxpayers filing jointly are eligible to deduct up to $20,000) in Oklahoma 529 contributions each year.5

One of the benefits of 529 plans is flexibility in contributions. There are no annual contribution limits for 529 plans. However, there may be gift tax planning implications and an aggregate contribution limit, depending on the 529 plan in which you are participating. 

Ownership is an important aspect of 529 plans. Currently, parent-owned 529 accounts impact the Free Application for Federal Student Aid (FAFSA) calculation, potentially reducing the student’s financial aid award. While FAFSA may not immediately come to mind as a necessity, it is recommended that every student complete a FAFSA. Although it is perfectly fine for there to be multiple 529s for the same beneficiary, due to recent changes with FAFSA, there are some advantages to structuring 529s with grandparents as owners.6 Prior to these changes, grandparent-owned 529 plans were included in the FAFSA calculation once distributions started and were considered “untaxed student income” to the student. Under the new FAFSA rules, the only income reported for the student will come directly from the federal income tax return(s) used for the FAFSA, eliminating the impact of grandparent-owned 529 distributions on eligibility. 

One of the most asked questions when it comes to 529 plans is, “What if the beneficiary doesn’t attend college or there are funds remaining?” There are several planning opportunities in these situations. First, the beneficiary of a 529 plan can be changed to another family member, and the definition of family is quite extensive.7 529 plans can be used for vocational and trade school. And, of course, there is always the option to withdraw the funds and sacrifice the tax benefits. 

There are many planning opportunities within 529 plans; if you are considering funding a plan, be sure to visit with your advisory team. 



The content of this article is developed from sources believed to provide accurate information. The information in this article is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. All expressions of opinion are subject to change. This content is distributed for informational purposes only, and is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

Castlepoint Wealth Advisors | Oklahoma Wealth Advisors | Kristen Buchman - Advisor

Kristen Buchman, CFP®


Kristen is an advisor for Castlepoint Wealth Advisors, an Independent Wealth Management firm in Oklahoma City. She works in lockstep with the advisory team to provide client investment advice and implement the firm’s financial planning strategies.
Read more Kristen Buchman’s blog posts and articles.