Know When to Stop 529 Plan Contributions

US News

Most parents haven't saved enough in their child's 529 plan, a tax-advantaged college investment account, to pay for four years of college tuition and fees. While 529 account sizes are growing, according to a recent report on paying for college from the College Savings Plans Network, the average amount of $17,000 invested at the end of 2012 was roughly equivalent to one year's tuition and fees at a public university.

But there are times when deposits need to be reduced or stopped, temporarily or permanently, says Jimmy Williams, a personal financial specialist. Reasons can range from changes in education plans to leftover funds from a sibling's account. The following are a few times when it may be best to stop funding a 529 plan account.

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1. A family member has met contribution goals: Grandparents often try to give to their grandchildren evenly, Williams says. If the goal is to give $50,000 per grandchild, it's possible a grandparent may complete funding $50,000 for an older grandchild and then move on to donating to another grandchild's account, he says. This doesn't mean the parent would stop contributing, but it does mean the grandparent has, he says.

2. The student earns a full scholarship: If a parent's only child scores highly on a standardized test such as the ACT or SAT and receives a full ride to the university of his or her choice, then parents may not need to continue funding the child's 529 plan account, Williams says.

While full scholarships aren't available to everyone, some scholarship funding is relatively common. According to a study by Sallie Mae, 61 percent of families surveyed had a student receive either scholarships or grants for the 2011-2012 school year, and the average recipient got more than $7,000. This would reduce the amount parents trying to fund the full cost of university attendance would need to save in 529 plans.

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However, the discontinuation of funds should be based on having enough in a 529 plan for other educational expenses and future education needs, he says. A laptop required by the university could be paid for out of 529 plan funds, he says, or the balance could be used for graduate school.

3. There is a change in education plans: At age 16, a teen could swear he or she is destined for law school and a parent saves accordingly, but then the student earns a 2.4 GPA in the first and second years of college. Since money not withdrawn for education could incur a tax penalty, it may be best to stop adding funds to pay for law school, Williams says.

4. Family income decreases: Certain life circumstances may require money in a more urgent manner, says Chadderdon O'Brien, a financial risk manager. For example, if the main income earner loses his or her job, eliminating 529 contributions may be necessary, he says. But 529 plan contributions can resume once the situation is resolved, he says.

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5. The family has met personal savings goals: "If the plan balance is high, parents and relatives may cease funding," O'Brien says. Parents should avoid putting too much into a 529 plan because of tax penalties on withdrawals and the need to fund retirement accounts. A high balance depends on the personal goals of the family, based on how many years of college and the particular colleges they're willing to pay for their child to attend, he says.

6. An older sibling has an overfunded plan: "Since the unused dollars in a 529 plan for an older sibling can be transferred to a younger sibling's plan, this may be a reason to stop 529 contributions for the younger child," O'Brien says.

For example, an older sibling has an account balance of $40,000 after completing college. The younger sibling has $10,000 and two years left at a university where the annual cost of attendance is $25,000. The younger sibling could use the older sibling's remaining account balance.

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