Because 529 plans are sponsored by states – and nearly every state offers one or more versions of the plan – the features and benefits for a given plan vary from state to state. However, there are certain core features that hold true across all 529 college savings plans.
FEDERAL TAX BENEFITS
Provided that the money is used for qualified educational expenses, all 529 college savings plans feature significant federal tax benefits:
- Tax-deferred growth. Any money earned in the plan is free from federal income tax. This means that your investment have the chance to grow more quickly than it would in a taxable account.
- Tax-free withdrawals. Unlike money invested in stocks or mutual funds, when you withdraw funds from a 529 college savings plan to pay for qualified college expenses (such as tuition, room and board and books), the money is free from federal income tax. However if you withdraw funds and use them for non-qualified expenses, taxes and penalties will apply.
STATE TAX BENEFITS
Many plans also offer state tax benefits:
- Potential state income tax deductions and exemptions. Depending on the state-sponsored plan you select, you may also benefit from a state tax deduction or state income tax exemption when you withdraw your plan savings. Therefore, when making a selection, be sure to review your state’s plan carefully to see if additional tax benefits are available.
GIFT AND ESTATE TAX BENEFITS
Anyone who provides a gift amount to a 529 plan may enjoy a federal gift or estate tax benefit. This is often attractive to grandparents looking for a tax-advantaged way to support a child’s dreams.
- Tax-free gift amounts. Gifts of up to $13,000 per year to a single beneficiary are generally not subject to either the federal gift tax or the estate tax.
- Even larger gift amounts can provide tax benefits. Even those who give up to $65,000 to a beneficiary in a single year (or $130,000 if married and filing jointly) may be able to reduce gift and estate taxes by electing to treat their gift as having been made over a period of up to five years.
- Large account balances. While a 529 plan can be opened with a small amount of money, most plans allow the account to accumulate upwards of $250,000 before withdrawals are taken.
Tax benefits are by no means the only feature of 529 college savings plans, though they may be the most well known. Make sure to review all features, benefits, and restrictions before deciding on a plan.
FLEXIBILITY AND CONTROL
A 529 plan is highly flexible, particularly when it comes to who can open an account, who can make contributions, who can be the plan’s beneficiary, and when and how money saved in the account can be spent.
USE PLAN PROCEEDS (ALMOST) ANYWHERE
- The money you save can be used at virtually any college or university. The funds in your account can be withdrawn to pay for qualified expenses at any accredited school in the U.S., including many community colleges, vocational schools, and even some foreign schools.
- Pay for other college-related expenses. Savings in a 529 college savings plan cover all qualified expenses including tuition, mandatory fees, room and board, books, supplies and required equipment for attendance at a higher education institution.
IT’S EASY TO OPEN A PLAN AND MAKE CONTRIBUTIONS
- Anyone can open a plan. Provided they meet the minimum age limit (which varies by state) and U.S. resident requirements, a 529 college savings plan account can be opened by anyone – a parent, relative, or even a family friend. There are no income limitations and spouses can open a plan as joint owners.
- Enjoy an easy enrollment process. Once you chose a plan, enrollment is a relatively easy process. You can either open an account online, or simply fill out and mail in a form. You can also work with a financial advisor to open an account.
- You don’t have to have lots of money to open or contribute to a plan. Although minimum amounts vary from plan to plan, most can be opened with as little as $25 to start, with minimum regular contribution amounts of $15. Contributions can be made conveniently through check, automatic transfers from a bank account, or even payroll deductions.
- Family and friends can make contributions. Contributions to a 529 plan do not have to be made only by the plan’s account owner. Anyone can offer a contribution and most plans even provide gift coupons for this purpose.
- You can transfer custodial accounts or other 529 accounts into a new 529 plan. If you have set up a custodial account for a child such as an UTMA, a Coverdell account, or even another 529 plan, you may be allowed to roll over the savings of those accounts into your 529 plan.
RETAIN CONTROL OF YOUR SAVINGS
- The plan’s owner has total control over the money. The owner of a 529 plan has complete control over who receives the money, when they receive it, and how the money will be spent. If the money is spent on non-qualified expenses, penalties and taxes will apply.
- Anyone can be an intended student. Although the 529 college savings plan is designed to help you pay for a student’s future college expenses, it doesn’t matter how old that student happens to be. This means that money saved in the plan can be used for a child who may go to college someday or also an adult who wants to continue their education.
- It’s generally easy to change the plan’s beneficiary. If, for any reason, an account owner wants to use plan savings for a different student, most plans make it easy for them to do so. This type of change may be appropriate if the intended student wins a scholarship that will cover their college costs or if they decide not to attend college. If you decide to change the plan to benefit a student who is not a family member, you may have to pay a penalty.
- The plan’s owner can be changed. Most plans offer the ability for the plan owner to name a successor account owner (in case they pass away before plan savings are withdrawn) or transfer the ownership of the plan to another person altogether.
Creating and keeping a college savings strategy does not have to be a daunting task, because investing is easy to do, the flexibility leaves you with options, you are not restricted by who can use your savings and you retain control over how your savings are used.
INVESTMENT FLEXIBILITY
As a part of becoming a 529 college savings plan account owner, you will need to make choices on how to invest your plan savings.
- Choose from a wide range of investments. 529 college savings plans usually offer a range of investment portfolios to match your needs, time frame, and tolerance for risk. These investment portfolios are generally made up of mutual funds and similar investments and are managed by professional investment managers.
With access to a broad range on investment options, you can choose how you want to invest your funds, however it is important to take into consideration your tolerance for risk and your time horizon and your savings goals.
Investments in 529 college savings plans are neither FDIC insured nor guaranteed and may lose value. Please note the plan's disclosure document includes details such as investment objectives, risks, charges and expenses, and other information that you should read and consider carefully before investing. You can obtain a copy of the plan document from each 529 plan sponsor.