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A 529 Plan account grows at your investment assumptions without tax. Withdrawals are tax free up to the year’s qualified education expenses: expenses you fund from the 529, plus expenses marked as qualified education. The earnings share of any other withdrawal is ordinary income plus a 10% additional tax. CoastMath tracks your contributions as the account’s basis to find that share.
New 529 accounts stay out of the drawdown order, so ordinary shortfalls in retirement never draw on them unless you add them.
- Add the account: AccountsAdd account, Account Type 529 Plan, with today’s balance. Enter Total contributions if you know them; blank treats the whole balance as contributions.
- To keep saving, add a rule in Income allocation with the 529 as Destination account; see Direct surplus into accounts.
- Add the education expense in Expenses, with start and end milestones for the school years. In Advanced: growth, funding and timing, check Qualified education expense if the 529 may pay it through the drawdown order rather than as a selected account.
- In the expense’s Advanced: growth, funding and timing, use Fund from a specific account to select the 529, then a backup account such as checking.
- Open Drawdown order, add the 529 and place it above the backup account’s type.
The 529 grows at the start of each year like any investment account. Tuition is withdrawn through the year, so the dollars withdrawn don’t earn the whole year’s growth; CoastMath removes that unearned growth when it takes each withdrawal.
| Opening balance | $67,416 | |
|---|---|---|
| + | Growth at 6% | $4,045 |
| − | Tuition withdrawalsUntaxed | $25,000 |
| − | Growth not earned on money withdrawn during the year | $680 |
| = | Year-end balance | $45,781 |
- From the 529
- From checking
The 529 starts two years before college with $60,000 and grows at 6%. It’s listed above checking in the drawdown order, and both accounts are selected for the expense.
Show data
| Year | From the 529 | From checking |
|---|---|---|
| College year 1 | $25,000 | $0 |
| College year 2 | $25,000 | $0 |
| College year 3 | $23,577 | $1,423 |
| College year 4 | $0 | $25,000 |
Each year CoastMath adds up the qualified education expenses: every expense funded from a 529, and every expense marked Qualified education expense. Withdrawals for an expense funded from the 529 are always tax free. Other 529 withdrawals, such as a shortfall the drawdown order covers, are tax free until the year’s marked expenses are used up.
Beyond that, a withdrawal is part contributions and part earnings, in proportion to the account’s balance. The earnings share is ordinary income for the year, and a 10% additional tax on it is paid from the withdrawal, which is grossed up so the rest still covers the bill.
| Earnings share of the balance | 60% | |
|---|---|---|
| Withdrawal$10,000 ÷ (1 − 10% × 60%) | $10,638 | |
| − | Additional tax: 10% of the $6,383 earnings share | $638 |
| = | Left to pay the bill | $10,000 |
The $6,383 of earnings is added to ordinary income that year. The account’s contribution basis falls by the contributions share, $4,255. A warning names the year.
Optionally, Plan detailsState deduction for 529 contributions subtracts the year’s 529 contributions from state taxable income, up to the state’s cap, in the states CoastMath has verified: Massachusetts ($1,000, or $2,000 joint), Michigan ($5,000 or $10,000, less qualified withdrawals), Missouri ($8,000 or $16,000), New York ($5,000 or $10,000) and South Carolina (no annual cap). It assumes contributions go to your own state’s plan.
A 529 isn’t part of your gross estate for estate tax, though it counts in net worth and passes to heirs; see Estate tax and net estate.