A 529 plan is an investment account where you can set money aside for a loved one’s education expenses and receive tax benefits. The money in your 529 account can grow on a tax-deferred basis and can be withdrawn tax-free if it is being spent on a qualified expense.
- Potentially increasing savings for a child’s education with tax-free earnings. Other investment vehicles often incur taxes and cannot grow tax-free, reducing the overall amount of savings.
- Tax incentives. While not the case with all states, many states do offer additional tax incentives on top of the tax-free earnings.
- Control over use of assets. 529 plans give clients control over the assets, so children can’t take the funds and use them for a purpose other than education.
- Flexibility to change. Plans can be changed twice a year and rolled over once a year.
- Open to all. Everyone is eligible to contribute, regardless of income size, and contributions don’t have to be reported on tax returns. In 2021, individuals can contribute up to $15,000 per beneficiary (a married couple can contribute up to $30,000) without using up any of their lifetime gift tax exemption.
- Save on other educational resources. While 529 plan assets can be used to pay for tuition and books, they can also pay for computers, internet access and other equipment.
- 529 plans aren’t just for college. They can be used to pay up to $10,000 per year per student for K through 12thgrade programs. 529 assets can also be used to pay for registered apprenticeship programs and repayment of college debt.
Here’s an easy cheatsheet of qualifying expenses:
Types of 529 Plans
- College savings plans. The money in the 529 account will be invested in mutual funds or another similar investment vehicle. The amount in this account will fluctuate based on the investment performance. This is the more common 529 plan.
- Prepaid tuition plans. You pay for all (or part) of your loved one’s in-state, public college expenses in advance. These are offered directly by the educational institution.
Choosing a 529 Plan
Every state offers a 529 plan, and you are not required to use the plan offered by the state you reside in. Each plan has a different investment strategy and you should select one that aligns with your timeline and risk tolerance. Someone with a low risk tolerance should not invest in a 529 plan with a more aggressive investment portfolio.
The best strategy is to reach out to us directly. We can walk you through the options and find an appropriate 529 plan for you.
Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawls used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.