By: 17 February 2022

In 2021-2022, U of MN’s estimated tuition was ~$15,370 (residents). Northwestern University’s was ~$60,000i.  

How do you plan for large college expenses, sometimes 10+ years in the future, when you will not know the final bill until a few months before?

This blog explores 529 College Savings Plans and your options in case of overfunding.

What is a 529 College Savings Plan?

529 Plans are a tax advantaged savings vehicle for education expenses. Funds grow tax-deferred (annual dividends, capital gains, and interest are not taxed) and withdrawals for qualified expenses are tax-free. Depending on where you live, there can be state tax benefits for contributions, e.g., MN’s $1,500 deduction ($3,000 for joint filers)ii.

What are Qualified Education Expenses?

Eligible expenses include tuition-fees, required books & supplies, room & boardiii, qualified study abroad programs, computers & internet access, $10,000/yr of elementary or secondary school tuition, and $10,000 of student loan repayments (lifetime limit).

Distributions should occur in the same tax year as costs are incurred to avoid taxes.

Ineligible expenses include college application & testing fees, health insurance, and travel, e.g., trip from Twin Cities to Evanston, IL.

How Much Can You Contribute?

Each state’s 529 Plan limits contributions once balances reach a threshold, e.g., MN’s College Savings Plan has a ceiling of $425,000. However, there are no annual limits.

Contributions are considered gifts. In 2022, you can gift $16,000 per beneficiary without having to file form 709 and it counting towards your lifetime gift tax exemption ($12.06M).

Contributions are excluded from your taxable estate, which can be beneficial if you expect assets to exceed the estate tax exemption ($12.06M federal and $3M MN).

There is a special, superfund, feature, which allows you to make 5-years of contributions up-front.

Example: Danny & Sandy are married. They just sold their company for $2M. Due to their wealth having been tied up in the business, they have not saved for their 3 children’s future college expenses. They can superfund $480,000 of contributions between three 529 Plans without affecting their lifetime gift tax exemption.

$16,000 annual exclusion x 5 years of contributions x 3 children x 2 parents = $480,000

I Overfunded a 529 Plan. What Are My Options?

If you overfunded your child’s 529 Plan, do not worry! You have options.

Graduate School - Is your child interested in getting an MBA or MD? Funds not used for undergraduate tuition can be used for graduate school.

Change the Beneficiary - Have several children? The beneficiary can be changed from one child to another. Alternatively, the new beneficiary can be yourself, if interested in furthering education, or a future grandchild allowing funds to continue growing tax-free and gifting to posterity.

Change the Owner – Time to give your child the reins? You can have them be the new account owner handing them responsibility for the funds.

Nonqualified Withdrawal – None of the above appealing? You can withdraw the funds. Contributions are tax-free, but earnings are taxed as ordinary income and subject to a 10% penalty.

Example: Mike contributes $75,000 to a 529 Plan. It grows to $100,000. Mike withdraws the funds and buys a boat. The $25,000 of gains incur $8,000 in taxes (assumed 22% income tax rate + 10% penalty) for a net withdrawal of $92,000.

There are exceptions to the 10% penalty e.g., the beneficiary dies or becomes disabled, receives a tax-free scholarship, attends a US military academy, etc. Ordinary income taxes still apply in these cases.

Example: Mike contributes $75,000 to a 529 Plan. It grows to $100,000. His son gets a $50,000 scholarship. Mike withdraws the funds and buys a boat. The $25,000 of gains incur $5,500 in taxes (assumed 22% income tax rate) for a net withdrawal of $94,500.


529 College Savings Plans are a great way to save for children’s future college expenses. They offer tax favorable growth, bucketed savings where funds are intentionally set aside for this big expense, and possibilities in case of overfunding.

This way, even if you have been saving for Northwestern and your child decides to become a Gopher, you can rest easy knowing you have options.


iiMN residents can choose between the deduction or a non-refundable tax credit equaling 50% of contributions up to $500, subject to income limits. The deduction/credit is available whether you use the standard deduction or itemize.

iiiStudents must be enrolled at least half-time. Expenses are limited to college’s cost of attendance (COA) found on their website.

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