Potential Benefits of 529 Plans
Key takeaways
529 plan are tax-advantaged¹
The account owner has flexibility
You can save for more than college
Looking for a college savings plan that’s tax-advantaged, flexible, and professionally managed? Look no further than 529s. Below is a list of potential benefits provided by this popular education savings plan.
529 funds grow tax deferred
Money can grow in a 529 plan by way of interest, dividends, and capital gains on the investments in the portfolio. The good news is that tax-deferred status means the savings grow without taxes reducing the amount saved each year. This is a big difference from a standard brokerage account or investment that is taxed each year — reducing total gains as a result.
Tax-free distributions for higher education expenses
Once it’s time to pay for college, 529 plan withdrawals can be used to pay for qualified expenses on a tax-free basis1. Qualified expenses include tuition, room, board, books, and other expenses that the college, university, or other eligible institution deems necessary for students. Withdrawals can be a tremendous benefit — the investment has been growing tax-free and could be used tax-free.
Account owner has flexibility
The owner of a 529 plan can change the account beneficiary to other members of the family (or themselves) without penalty. This is particularly helpful if money is left over once a student has finished college or if the student decides not to go to or finish college. The account owner can simply redesignate the beneficiary.
No Income limits
529 savers have no income limitations, meaning there is no maximum income cutoff that would prevent a person from opening a 529 plan. 529s are designed to give all families access to a college savings vehicle with tax advantages.
529 plans avoid the “gift tax”
You can contribute up to $16,000 annually to a beneficiary’s 529 plan while avoiding any federal gift tax2 on the proceeds. Another option, especially important for estate planning, is to deposit up to $80,000 into a beneficiary’s 529 account in one year ($80,000 is the sum of five years of contributions rolled into one year). This exception requires that no other contributions be made by that donor during the next five-year period to avoid the gift tax. Spouses may also contribute a like amount, which increases the gift-tax-free contribution to $32,000, or $160,000 per beneficiary if the five-year accelerated gifting provision is used.
No age restrictions
There are no minimum age requirements for beneficiaries or maximum age requirements for donors. This allows grandparents to help with college savings for grandchildren.
High maximum contribution limits
College may be expensive, but 529 plans can keep families covered. Each state has a specific total contribution limit as high as $300,000 to $550,000. That’s enough to cover undergraduate programs and even graduate level programs at many schools.
Protection of savings from bankruptcy and creditors
If the account owner files for bankruptcy, all or part of the 529 account may be excluded from the bankruptcy estate by federal law or may be exempt by special state bankruptcy exemptions. Certain exceptions may apply, but generally contributions made more than two years prior to a bankruptcy filing would not be accessible to creditors according to federal rules.
Professional money management and service
Most 529 plans are offered by mutual fund companies bringing professional money management to the portfolio. These companies generally offer strategies that adjust the portfolio over time, like an age-based investment strategy that focuses on high growth during early years but shifts to a more conservative portfolio as the student nears college attendance.
529 plan savings can now be used for more than college saving
In recent years, Congress has expanded the use of 529 plan savings to include tax-free withdrawals for:
- The payment of up to $10,000 of student loans per beneficiary
- Tuition and fees for secondary schools
All of these benefits have combined to make 529 plans the first choice for many families planning to pay for future college expenses. Visit our CollegeBound 529 Resources page to learn more about 529 plans and how to get started.
Footnotes
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1
Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Tax and other benefits are contingent on meeting other requirements and certain withdrawals are subject to federal, state, and local taxes.
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2
The gift-tax exclusion applies, provided the 529 account owner makes no other gifts to the beneficiary during a five-year period. Contributions between $16,000 and $80,000 ($32,000 and $160,000 for married couples filing jointly) made in one year may be prorated over a five-year period without subjecting the donor(s) to federal gift tax or reducing his/her federal unified estate and gift tax credit. If an individual contributes less than the $80,000 maximum ($$160,000 for married couples filing jointly), additional contributions may be made without subjecting the donor to federal gift tax, up to a prorated level of $16,000 ($32,000 for married couples filing jointly) per year. Gift taxation may result if a contribution exceeds the available annual gift tax exclusion amount remaining for a given beneficiary in the year of contribution. If the account owner dies before the end of the five-year period, a prorated portion of contributions between $16,000 and $80,000 ($32,000 and $160,000 for married couples filing jointly) made in one year may be included in his or her estate for estate tax purposes. Please consult your tax and/or legal advisor for further guidance.
