Information provided by College Savings Plan Network and College Savings Foundation has been referenced on this page. To visit their websites go to:
College Savings Plan Network: https://collegesavings.org
College Savings Foundation: https://www.collegesavingsfoundation.org/
What Is A 529 Plan?
Congress created 529 Education Savings Plans in 1996 under Section 529 of the Internal Revenue Code. They are state-sponsored, tax-advantaged vehicles for qualified post-secondary education expenses, such as tuition, fees, books, required supplies, equipment and room and board. There are two types of 529 Plans: savings plans, which allow families to save for expenses, and prepaid tuition programs, which generally allow families to make advance tuition payments to cover future attendance at a designated in-state public college or university system. Most states offer a 529 plan, and some states offer both savings and pre-paid plans.
Savings in a 529 plan grow free from federal income tax, and withdrawals remain tax-free when used for qualified higher education expenses. Additionally, many states mirror the federal 529 plan tax advantages by offering state tax-deferred growth and tax-free withdrawals for qualified higher education expenses.
Why Invest In A 529 Plan?
- Investments grow on a tax-deferred basis, and earnings are free of federal income tax.
- Contributions are eligible for gift tax exclusion as long as certain conditions are met.
- Generally, account owners can remove contributions and future earnings from their taxable estate.
- Certain 529 plans offer some type of state tax deduction when residents invest in their own state’s plan.
- There are currently no income limits. Any U.S. resident or citizen, regardless of income, can open an account.
- Account owners can withdraw money at anytime.
- Funds may be used to pay qualified education expenses at any qualified educational institution in the U.S. (and some schools abroad), including any accredited public or private college or university, graduate school, two-year community or junior college and vocational and technical schools.
- Eligible educational institutions include most U.S. schools and some schools located abroad. The institution must be eligible to participate in the U.S. Department of Education student aid programs. To determine if a school is an eligible education institution, search for its federal school code at www.fafsa.ed.gov.
- Most plans offer low initial investments and a variety of investment options fitting various levels of risk and time horizons.
- The account owner decides when and how money in the account is withdrawn.
- Account owners can change beneficiaries and investment options, according to IRS guidelines.
Why State Plans Differ
Each state that offers a 529 plan determines how its plan is structured and which investment options are offered. While many plans allow investors from out of state, there can be significant state tax advantages and other benefits for in-state residents. These can include state tax deductions, matching grants, and scholarship opportunities, protection from creditors and exemption from state financial aid calculations. Click here to Compare 529 Plans by State.
Types of 529 Plans
There are two types of 529 plans:
Prepaid Tuition Plans
There are currently 13 prepaid tuition plans (sometimes called guaranteed savings plans) offered by 12 states and the Private College 529 Plan (PC529). These plans allow participants to pre-purchase future tuition at a predetermined rate today.
Typically, an account owner will purchase somewhere between one and four years of tuition for a young child, and when that child reaches college age, the plan pays out based on tuition rates at that time. Investment performance is often based upon tuition inflation. Prepaid plans may be administered by states or by higher education institutions.
College Savings Plans
College savings plans are different in that your account earnings are based upon the market performance of the underlying investments, which typically consist of mutual funds. Savings plans may only be administered by states. Forty-nine states and Washington, D.C. offer a savings plan. Most 529 savings plans offer a variety of age-based investment options where the underlying investments become more conservative as the beneficiary gets closer to college-age.
They also offer risk-based investment options where the underlying investments remain in the same fund or combination of funds regardless of the age of the beneficiary. In addition, many savings plans offer an FDIC/NCUA insured, money market or guaranteed option designed to protect an investor’s principal while providing for some investment growth, while others offer investments in certificates of deposit.
529 Plan Advantages & Benefits
A 529 plan is designed to encourage early and consistent savings efforts by offering an easy, affordable and convenient way for families to save for college. While the tax advantages are one of the primary benefits, states also offer a variety of features and benefits to help families reach their college savings goals.
- All withdrawals are exempt from federal income tax when used for qualified higher education expenses.
- All money grows free from federal and state income-tax.
- Many states also exempt withdrawals from state income-tax for qualified higher education expenses.
- The account holder retains control of the assets within the program regardless of beneficiary’s age.
- Most plans have very low minimum monthly contribution limits making them attractive to families regardless of income level. Some states have minimum limits as low as $15.
- The beneficiary can be changed at any time to another member of the beneficiary’s family (out to first cousins).
- Money can be used at virtually any accredited college in the country. You can find qualified schools on FAFSA’s website.
- Money can be used to pay for a variety of college expenses, including tuition, fees, room, board, books, supplies and required equipment.
- Contributions can be made conveniently through payroll deduction or automatic transfers from a bank account.
- Many plans offer maximum contribution limits of $300,000 or more.
- Assets within 529 plans are protected from bankruptcy.
- Most states offers a low cost plan that can be opened by contacting the plan directly.
- Many 529 plans are also offered through professional financial advisors who can help you choose a 529 plan and an investment strategy to meet your needs.
- Account owners can make a lump sum contribution of up to $75,000 per beneficiary or $150,000 if married filing jointly and avoid incurring a Gift Tax on this amount by electing to use five years of the annual gift tax exclusion all in one year. After utilizing this provision, the annual exclusion cannot be used again for the same beneficiary until the five year period has passed. Should a donor die within those five years, a pro-rata amount of the gift will revert back to their estate and be treated as a taxable gift.
- Funds in 529 savings plans can be used at virtually any accredited college or university in the U.S. and at some foreign schools. See eligible institutions at www.fafsa.ed.gov.
- Earnings from 529 plans are not taxed when used to pay for qualified higher education college expenses.
- The account owner of a 529 plan maintains control over the use of the account.
- Some states offer matching grants and other benefits to participants in their 529 plans.
- Your 529 plan contribution qualifies for the $15,000 per beneficiary annual gift tax exclusion ($30,000 for a married couple).
- There are two varieties of 529 plans: college savings plans and prepaid tuition plans.
- Savings in a 529 plan can be used to pay qualified higher education expenses such as tuition, room and board, fees, books, supplies, and equipment required for enrollment.
- Many states offer a state income tax deduction or credit based on contributions into a 529 plan.
- There are no income limitations on a person’s ability to contribute to an account.
- You can participate in almost any 529 plan across the country, no matter what state you live in.
- Minimum contributions can be as little as $10.
- In most states, you can contribute as much as $300,000 or more per beneficiary.
- Prepaid plans are currently offered by 11 states and 1 not-for-profit organization.
- More than $300 billion is invested in 529 plans across the country.
- More than 13.6 million 529 accounts are open nationally