Year-End Financial To-Do: Consider a 529 Plan

Dec 6, 2022

By Ashlee Ogrzewalla, CFP®, Vice President and Manager of Financial Planning & Marketing
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For those saving for education, 529 plans offer many great incentives. These plans offer tax-free investment growth, tax-free withdrawals for qualified education expenses, and even tax deductions or credits for contributions in some states. Year-end is a good time to review existing plans or consider opening one to take advantage of all the available benefits because contributions are considered gifts and must be made by the year-end to use this year’s annual gift exclusion.

Avoid taxes and penalties
529 plans do come with complicated distribution rules. Suppose the account holder uses 529 assets to pay for non-qualified expenses. In that case, the portion of the withdrawal considered a gain would be subject to a 10% penalty and ordinary income taxes. There isn’t any penalty or income tax on the principal (original deposits) withdrawn from the account. To avoid this, be sure that 529 withdrawals equal the correct amount of qualified education expenses for the year.

Items considered qualified educational expenses include:

  • Post-secondary tuition and fees
  • Room and board (if enrolled at least half-time)
  • Books
  • Computers
  • Internet Access

Account owners can also use 529 assets to pay for other education expenses. Some of these include:

  • K-12 tuition (up to $10,000 per year)
  • Repayment of existing student loans (lifetime max. of $10,000)
  • Continuing Education Expenses
  • Registered Apprenticeship Programs

There are also exceptions for distribution penalties. Check with a financial advisor to find out which ones may apply.

Possible state tax deductions or credits for contributions
When it comes to 529 plans, not all programs are equal. States that sponsor 529 plans have the flexibility to choose which kinds of tax benefits they would like to offer account holders.

    1. Some states allow contributions to be tax deductible or offer tax credits up to certain limits. These tax deductions and credits only apply to state taxes, not federal income taxes.
    2. States that sponsor 529 plans can require residents to utilize their programs to qualify for tax benefits. Currently seven states allow in-state tax benefits regardless of which state-sponsored plan is used to save, seven states don’t permit in-state tax benefits even though they levy state income tax, and 30 offer some form of tax. deduction.
    3. Most states have a December 31st contribution deadline, while others allow contributions to be deductible if made by the tax filing deadline (April).
    4. The maximum tax deduction varies from one state’s plan to another, but all offer high contribution limits.


Check with your financial advisor or tax professional to determine if your 529 plan contributions are eligible for tax deductions.

Utilize annual exclusion gifts
The IRS treats 529 plan contributions as gifts for federal tax purposes. For 2022, individuals can gift up to $16,000 per year without filing a gift tax receipt.

A unique aspect of gifting to a 529 plan is a concept called “front-loading.” This rule allows a person to use up to five years’ worth of annual exclusion gifts in a single year. A single person could gift up to $80,000 at once ($160,000 for a married couple) for 2022. Without filing a gift tax return, no additional contributions could be made for five years to the same beneficiary by that individual.

Front-loading also prorates significant one-time contributions over five years. For example, if a person contributes $50,000 in one year, the IRS counts the contribution as $10,000 over five years. The gift tax limit of $16,000 would allow the owner to still contribute $6,000 each year for the next five years.

A 529 plan is a great way to save and pay for education expenses, but the rules surrounding these plans can be complicated. Financial aid, investment selections, qualified expense criteria, and the amount to contribute are just a few considerations. Including a financial advisor and tax professional in these discussions and requesting education planning to be a part of your family’s comprehensive financial plan are great ways to ensure you take advantage of all the benefits while avoiding any hefty penalties.


Benjamin F. Edwards does not provide legal or tax advice, therefore it is also important to consult with your legal and tax professionals for additional guidance tailored to your specific situation.