Review Your 529 Plan Before Year-End

December is not generally the time of year that brings school to mind. But adding a review of your 529 education savings account to your year-end planning list could save you tax dollars. Here are three ideas to consider before December 31.

  • Review plan investments. You can change the investments in 529 accounts once a year, generally without federal income tax consequences. Reasons to make a switch include poor investment performance, a change in beneficiary, or the need for more liquidity to protect capital as a beneficiary reaches college age.
  • Coordinate withdrawals. Add up the qualified education costs you paid during the year. Then check your eligibility for education tax breaks such as the American Opportunity Tax Credit. You can claim an education credit in the same year you withdraw 529 plan funds. However, you cannot use the same expenses to claim a credit and take a tax-free distribution from your 529 plan.
  • Make contributions. Contributions to 529 plans are gifts and you can use your annual $14,000 exclusion to shelter them from federal gift tax. You can also make an election to contribute as much as five years’ worth of gifts — up to $70,000 per account — in a lump sum.

    Contributions made by year-end may be deductible on your state income tax return.

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