529 Plans

529 plans are state-sponsored, tax-deferred investment accounts that allow investors to invest toward the costs of education, regardless of income. A 529 plan gives investors the opportunity to invest in pre-determined investment portfolios across multiple asset classes. Most plans have rules on how you can allocate your assets based on your child's age, generally getting less aggressive as he or she approaches college age.

Tax advantages: A 529 plan offers several federal income tax benefits. Any investment earnings grow tax-deferred, and distributions to pay the beneficiary’s qualified education expenses come out federally tax-free. Tax-deferred growth and tax-free withdrawals for qualified education expenses can be beneficial when saving and paying for college. If withdrawals are used for nonqualified purposes, the earnings portion may be subject to federal and state income tax and a 10% federal penalty tax. Check with your home state as state tax laws vary.

Estate tax benefits: Contributions are considered a completed gift, which means they may be excludible from your taxable estate. Starting in Tax Year 2023, you can contribute up to $17,000 ($34,000 for married couples) per year per beneficiary free from federal gift tax. 529 plans have a special accelerated gifting rule that allows you to gift as much as $85,000 in a single year without incurring gift tax consequences.¹ The $85,000 contribution counts as a $17,000 gift in the current year and in each of the succeeding four years. Married couples who jointly file tax returns can contribute up to $170,000. You can make these gifts to as many beneficiaries as you want without incurring a gift tax. This option allows you to make a larger initial gift without incurring gift tax. Consult with your tax advisor regarding your specific situation.

Flexibility: You can use account withdrawals at eligible schools nationwide. A 529 plan covers almost all expenses related to college, including tuition, fees, reasonable room and board, books and equipment including computers, software, and supplies. Reasonable room and board are considered qualified expenses if the student is enrolled at least half time. If a child decides not to attend college or doesn’t use all of the funds, you can change the beneficiary to another member of the family. Federal law also allows for 529 plans to be used for k-12 expenses, up to $10,000 per year. In addition, recent federal tax law changes also allow plans to be used toward apprenticeship programs and student loan repayments (up to $10,000). State plans vary and not all states consider these qualified withdrawals.

As the owner of a 529 account, you may withdraw all or a portion of the funds at any time, even for paying expenses not related to college. However, the earnings portion of funds withdrawn for nonqualified expenses will be subject to the distributee’s federal and state income tax rate plus a 10% federal penalty tax on the earnings portion of the withdrawal. If the beneficiary receives a scholarship, the account owner may withdraw up to the amount of the scholarship without incurring the federal penalty tax on the earnings portion. The federal penalty tax is also waived if the beneficiary dies or becomes disabled.

529 prepaid tuition plans: Some states offer an alternate 529 plan that allows you to prepay tomorrow’s college tuition at today’s prices to attend an in-state college. Some plans cover tuition, fees, and room and board, while others only cover tuition and fees.

Like any other investment, 529 plans are subject to market risks, and returns are not guaranteed. It's important to consider more conservative investments if you have a short time to save, especially if your child is near the beginning of his or her college education. To protect your investment and your child's education, consider your investment goals and objectives, as well as your tolerance for market volatility and investment risk when selecting your investments.

In addition to 529 plans, there are several other college savings choices you may want to explore. These include Coverdell Education Savings Accounts and UGMA/UTMA Custodial Accounts.