How to use a 529 when your student is in college

Written by
Damian Dunn

We set up college accounts for both of our kids when they were born. They were originally UGMA's but then we transferred them to 529 accounts. My oldest will be starting college in August. She has an academic scholarship so our annual fees will be about $44,000. As of today, she has just over $80,000 in the 529 account. We will pay the difference through current cash flow. We are blessed to be in a position to be able to do so. My question is - Is it better to deplete the 529 account and then pay from our personal finances or should I do a combination from each source each year?

Also, we contribute the maximum annual deductible 529 contributions of $5,000. Should I continue to split the contributions evenly between both kids or load hers? My son has $71,000 in his account, has 3 more years of high school and plans to go to an equally expensive school and may earn a partial scholarship (but who knows).

Thanks for your help!


You’ve done an admirable job of saving for college, Rhonda, but now it’s time to start using the funds you’ve accumulated for their intended goal. What to do?! I’ve got some good news for you… the goal (college) is close enough for both kids that there probably isn’t too much strategy you can throw at this that will make a big difference. Let me explain that a bit more.

Before I do that, though, I want to take a minute to explain 529 accounts for those that may not know what they are and what advantages they offer. A 529 account is a type of savings vehicle authorized by the Federal Government and offered by States to encourage parents to save for their children’s education. While contributions aren’t deductible, some states offer significant tax advantages (credits, in some states) to make an annual contribution, so you benefit both now and in the future. All contributions placed into 529 accounts grow tax-deferred, meaning you don’t pay taxes on the interest and gains. If a withdrawal is used for a qualified expense, then it’s given tax-free status, and you’ll never have to pay tax on the gains and interest earned on your contributions. Not a bad deal! Additionally, there isn’t an annual contribution limit for a 529 account. You could potentially run into an issue with gift tax if you contribute more than $15,000 as an individual or $30,000 as a married couple to an account, though. 529’s are great ways to save for your kid’s education. The sooner you get started, the better off you’ll be in the long run.

Now, back to your answer...

There is a good chance that the investments inside of your 529 accounts are in a conservative allocation. This is done when you’re either close to, or in the process of, using the funds for their intended purpose. Why? The reduction in risk is to try and prevent the value going down too much during a lousy market period. You wouldn’t want to turn your daughter’s $80,000 into $60,000 because the stock market decided to tank the year you needed to use the money. So, you move money out of the riskier positions into “safer” investments to keep that from happening. In fact, some people move a considerable portion of their money into a money market style fund to protect the value or the account.

Why is this important? Because you’re probably not going to grow the 529 funds much from this point on. This means that you could potentially view your daughter’s account as just a pile of cash waiting to be used as needed. Your son isn’t far behind, either. His account is most likely invested in a way that will purposefully limit growth potential so you can protect it from losing too much value.

So, what should you do?

Keep contributing to the 529s. Absolutely, 100%, keep adding. It really won’t make much difference if you split the contributions up between the kids, however. If you want to try and get a little bit of growth out of the contribution, your son’s account is probably the place to put it based on the time horizon. As long as you make your contribution and get the tax benefit, the location of the contribution won’t be an issue to lose sleep over.

Plan for “that one year.” The way you have explained things to me, it sounds like you’re going to have at least one year when you have two kids in college. Make sure there are enough 529 funds available for either child to match up with the available cash flow to cover all of your college-related expenses that year. I don’t think it will be a problem for you based on what you’ve shared, but you’ll be writing some big checks that year and thinking ahead doesn’t hurt.

Use the 529 resources as needed. As I mentioned earlier, there may not be much strategy to employ outside of some general timing considerations. For example, if you have the ability to pay a bit more for college expenses from cash flow for the next few years, maybe you consider it. The benefit could be having your daughter’s last year of school paid for from the 529. So, instead of writing two personal checks (daughter and son) from your cash flow, you only write one.

Adjust your investments accordingly. We know two things right now. First, you’re going to start using the 529 funds soon. Second, we’ve been in a bull market for quite a long time. It stands to reason that there will be a pullback in the market sooner rather than later. If your investments are still allocated on the aggressive side, you may want to reconsider it.

Enjoy! Make sure to frequently step back and take it all in as your kids begin to find their own way.

Good luck to you and the rest of your family on this new adventure!

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