Lagniappe and Your College Savings Tax Shelter. Qualified Tuition Programs under IRC Sec. 529.

Known more commonly as college savings accounts, 529 accounts, or 529 higher education plans, these are popular accounts that parents should be familiar with, especially when they come with additional benefits. In Louisiana, where I’m based, a little something extra is known as “lagniappe” (pronounced lan-yap).

First, let’s assume a few things:

  1. You have children or grandchildren (or are planning to) and are seeking to help them with higher educational expenses after they graduate from high school.
  2. You have the means to save and plan ahead.
  3. You are looking to optimize your approach to one of the largest expenses many US parents will face.

Briefly, from the top, the 529 savings plan was created by the US Congress in 1996. Its general framework for application under 26 U.S.C Sec. 529 comes in two major forms. Both types of 529s have pros and cons, depending on your financial situation and the plans available in your individual state.

The first type of 529 is a pre-paid tuition program, which allows payments toward future college tuition and fees at today’s current rates. This can be a great way for parents to pay for tuition and fees early, especially if tuition inflation remains high. This type of prepaid arrangement can be administered privately at qualifying schools or by states. However, few states offer pre-paid tuition programs and many states have closed access to them.

The more popular type of 529 plan is a savings and investment account that allows individuals to set aside money for education-related expenses, beyond tuition and fees. This variation typically provides more flexibility and benefits than pre-paid tuition plans. These plans are administered through the states, not by the federal government or private schools. Every state has some form of 529 savings plan, and the plans differ from state to state. For example, some states allow outside residents to access their plans through out-of-state salespeople (financial advisors, financial brokers) while others are open only to state residents.

Funds contributed to these accounts are not federal tax deductible, but you can withdraw money for qualified higher education expenses (see page 47 of IRS Publication 970 for details) without having to pay taxes on any investment gains. Tax-wise, the 529 savings account is akin to a Roth IRA, except it is used for higher education instead of retirement.

So where does the lagniappe come in with 529s?

Remember that the 529 plan account programs are administered by the individual states. A variety of states decided to offer additional benefits to their residents. With regard to savings plans, some states, such as Louisiana and New York, provide state income tax deductions for contributions to these accounts. Some states, including Louisiana, even match a percentage of contributions to the 529 account. A few states even combine these two benefits, subject to limitations, and other benefits and drawbacks may be available in your state.

Another state’s plan usually does not have any added benefits for out-of-state residents, so utilizing your own state’s plan may entitle you to otherwise untapped benefits. Furthermore, many 529 plans with lagniappe have excellent investment choices, and the funds can be used at nearly any higher educational institution (not just in-state schools), which may not be what you were told.

Depending on where you live, you could save for 18 years or more in a 529 savings account, with your state potentially matching the funds you contribute. You could also receive a state income tax deduction on your contributions. Although both matching funds and tax deductions are likely subject to limitations, wouldn’t you want to take advantage of that kind of program?

If you are like me, the answer is absolutely yes, because we know that even at small contribution amounts, benefits can add up quickly, especially with potential compounding of investment returns.

Amazingly, many people in states with 529 plan lagniappe, like Louisiana, don’t even know about the added benefits. Instead, they may have bought into a 529 plan in another state through their online provider or were steered toward using another state’s 529 plan by a financial firm or advisor. It’s even possible your advisor doesn’t know much, if anything, about your own state’s plan and is only recommending a 529 plan account that offers him or her a commission.

How are you supposed to know if you can get lagniappe with a 529 account?

That’s easy, visit this link, choose your state, click on plan details, then scroll down to “Taxes and Other Benefits.” ( is a private website that I have no relationship with, and it is always best to verify information directly with your state’s 529 office.) For Louisiana’s 529 plan, called the START Saving Program, see the state-sponsored information available on the START homepage or the state’s overview of the program, available here.

Not all states provide lagniappe, but congratulations if you are already taking advantage of the benefits available to you from your state. If you just learned that you’ve been entitled to benefits and have not taken advantage of them, please send me an email. I’d like to hear your story.

As with most financial matters, there are many issues to consider before deciding on a 529 savings plan. Below, I answer some common questions, but for further details please visit the IRS FAQ on 529s and IRS Publication 970.

  • Do I have control of the funds contributed to a 529 investment account?

Yes. When you establish a 529 account in your name, you are in the driver’s seat. Typically, when you set up one of these accounts, you can specify yourself as the owner and a child as the beneficiary. Many people with more than one child have accounts for each child. You can name a successor owner (a spouse, usually) and you can change the beneficiary if you like, even to yourself.

If you are a grandparent, the funds can remain under your control and you can choose how to structure the account. For example, you can gift funds to your grandchild’s 529 account. You can keep the account in your own name or even change the beneficiary and successor owner if you like. If you live in a state with a state income tax deduction, typically it is the account owner who is entitled to that benefit. So if you want to take advantage of the deduction, it is probably best to keep the 529 account in your own name.

  • What if my child (the beneficiary) does not go to college or drops out?

If your child decides not to pursue higher education, you can simply change the beneficiary (with some potential tax consequences if the new beneficiary is outside the family) or you can liquidate and close the account, likely owing tax on any account gains.

  • Will the 529 account influence my child’s ability to receive loans, financial aid and scholarships?

Yes, the account will likely have an effect on the monetary aid available to your child, but many factors influence availability and will vary by institution, the nature of assistance, the provider of the loan, and the account owner, among other considerations. Please see your target school’s financial aid department, and for more information review this article regarding the effect of 529 accounts on financial aid and visit the FAFSA (Free Application for Federal Student Aid) website.

  • What is the maximum and minimum that I can contribute to a 529 plan account?

Regarding minimums, it depends on the provider. Some plans allow for contributions of as little as $10 to open an account, while others may require higher or lower amounts. The maximum contribution allowed varies by the plan, but there are IRS gifting rules to be mindful of. Although 529 plans have a special gifting rule to include up to five years’ worth of annual exclusions in a single year (used mainly as an estate mitigation planning strategy), it is best to inquire with your particular target plan.

  • I have a 529 plan account in another state, and I moved and want to transfer it to my new state. Or, I have a 529 plan in another state and I want to take advantage of the lagniappe my state offers. What can I do?

Visit the website of the state plan in question or call them for specific direction. You will likely need to submit a new account application (including your information, your successor owners’ information, and your beneficiaries’ information) as well as a completed transfer request form along with a copy of a recent statement from the 529 plan account you are looking to transfer. These forms may be available online through the provider you are transferring toward.

Joseph M. Prisco Jr, JD, CFP® is the founder of Advocacy Financial, LLC. He helps clients manage and optimize their financial and estate planning affairs. For more information, or to consult with Mr. Prisco, call 888-787-4590 or write to him at

Investments in 529 savings plans involve risks to principal and may involve additional fees such as enrollment charges and annual maintenance fees. 529 plans offer no guarantees. Depending on your state of residence and the state of residence of the beneficiary, the plan may or may not be eligible for state tax benefits. There are exceptions to the gift tax and estate tax exemptions; please contact a qualified tax, legal or financial advisor for more information prior to investing.