They are still the best tool in your toolbox for college planning, but there have been some changes. Here is a quick re-cap.

What are 529 plans?

They are investment vehicles that are named after the Internal Revenue Code that created them. They have helped many of our clients pay for college for their children as they offer tax advantages when used for qualified education expenses at eligible educational institutions.

What tax advantages do they offer?

When used appropriately, the money placed in the 529 account is allowed to grow and be distributed tax-free. Additionally, many states are now offering a state tax deduction for contributions into the account. Here is the most recent list. It is subject to change, so continue to check back annually for the most up to date information. You are not obligated to use your state's 529 plan. A common scenario is that your state does not offer a state tax deduction (or you don't pay state taxes at all), therefore you can open a 529 plan in any state of your choosing, as long as the plan doesn't have residency requirements. What is an "eligible educational institution"?

Any college, university, vocational school, or other post-secondary educational institution eligible to participate in a student aid program run by the U.S. Department of Education (1).

New to the tax law passed in 2017, up to $10,000 in 529 withdrawals are allowed (once per year) to pay for K-12 tuition. Qualifying schools include public, private, and religious schools. That being said, you should check with your 529 plan to make sure they are conforming to the new federal law.

What are the qualified education expenses that the money can be used for?

Tuition, mandatory fees, room and board (limited to the cost of school housing), books, computers and related computer equipment. What about financial aid?

Having a 529 plan will affect your child's financial aid package, but very minimally, and not enough to dissuade you from using a 529 plan altogether. Assets owned by the parents, such as a 529 plan, will reduce a student's aid package by 5.64%. So if the 529 account is $50,000, the financial aid reward will be reduced by $2,820. The tax benefits and earnings on the 529 account are likely going to outweigh that $2,820. This also assumes you are eligible for any aid at all, which many children are not. Compare this to a UTMA account (another vehicle used for college savings) which would reduce the aid package by 20% ($10,000) since it is an asset owned by the child. Grandparent-owned assets are not included at all in the financial aid calculation, but they do affect the FASFA form in the year following the distribution as we noted in one of our previous blog posts.

Who can save to them?

Anyone. You can open as many 529 plans as you want and name anyone as a beneficiary. The most common scenario we see is that the account owner is the parent and the beneficiary is the child.

What if my child doesn't go to college?

The money in the 529 plan has to be used as directed. If not, you will owe federal and state taxes on the earnings and an additional 10% penalty. You may also have to refund an amount to the state if you received a state tax deduction. There are a few ways to avoid this tax bill and headache:

- You can transfer the leftover funds to a qualified family member, such a sibling. You would simply change the beneficiary on the account.

- If your child receives a scholarship, you are allowed withdraw the amount of the scholarship without penalty (but you will still owe taxes on the earnings).

- If your child goes to a trade school or coding school, the school may still qualify! Thisis the list of the current institutions that are qualified and it includes some trade schools. If the school is not on the list, it is recommended you contact the school directly to confirm. As noted above, if they are eligible to participate in a student aid program run by the U.S. Department of Education, you can use your 529 money.

Contribution limits

Contributions to 529 plans are considered gifts. Therefore you can contribute up to the annual IRS gifting limits ($15,000 per person or $30,000 per married couple filing jointly for 2018). There is also an exception for 529 plans where you can contribute a lump sum of 5 years worth of gifting ($150,000 per married couple filing jointly) but you cannot make any additional contributions for the following 4 years for that beneficiary.

Get another perspective

Read the fine print for the specific plan you are interested in. Rules in the financial and tax world are always changing, so make sure you review your financial strategy annually to make sure you are within present guidelines and benefit as much as possible with what is available to you.

(1) https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/eligible-educational-inst

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.