529 Plans

An option for funding your child's education.

There are several options for funding your child’s education. Let’s explore one great option, 529 plans.

Named for section 529 of the U.S. Internal Revenue Code, 529 plans are state-sponsored, tax-advantaged investment programs that allow donors, such as parents, grandparents, other relatives and friends, to save for higher education costs for a named beneficiary. The Pension Protection Plan of 2006 makes permanent the federal tax exclusion for withdrawals from 529 plans, if those withdrawals are used for qualified higher education expenses. However, tax laws are subject to change at any time. These and other tax implications of a 529 plan should be discussed with your legal and/or tax advisors.

It is also important to note that the tax implications as well as the investment choices of 529 plans may vary significantly from state to state. You should carefully consider these factors before establishing and contributing to a 529 plan. 529 plans are sold via Plan Description Documents, which contain detailed information regarding the plan, risks, charges and tax treatment. Meticulously read the Plan Description before investing. 

There are two types of 529 plans— 529 college savings plans and 529 prepaid tuition plans.

Features of 529 College Savings Plans

  • Federal tax advantages occur with 529 college savings plans. They are funded with after-tax contributions that have the opportunity to grow tax-deferred. Distributions are received free from federal taxes if they are used for qualified higher education expenses. Otherwise, the distribution of earnings are subject to a federal tax penalty and treated as ordinary income for tax purposes.
  • As 529 college savings plans are state-sponsored, some may provide state income tax advantages for the residents or taxpayers of that state. These benefits may include tax deductions for contributions to the plan and/or exemptions from state tax for qualified higher education distributions. Consult with a tax advisor regarding the state tax implications of a specific plan.
  • Almost anyone can establish a 529 college savings plan— from parents, grandparents, siblings and other relatives to friends and colleagues— for the benefit of others or themselves. There are no income limitations or age restrictions regarding who can open an account. In addition to accepting all in-state investors, most 529 college savings plans accept out-of-state investors, too. Just remember that funds must be used for qualified higher education expenses or they may be subject to a penalty and treated as ordinary income for tax purposes.
  • Substantial contributions are allowed with these college savings plans. Annual contribution amounts vary by state, though a donor may contribute up to $60,000 per beneficiary in the first year of a five-year period ($120,000 for married couples filing jointly).
  • A donor can set up a 529 college savings plan for just about anyone and maintain control of the funds, allowing for a change of the beneficiary. But the new beneficiary must be a close family relative of the original beneficiary, otherwise there may be adverse tax consequences. Beneficiary changes may be limited to one per year.
  • These types of college savings plans have various investment options. Select from several investment options offered by the state’s plan, which may include portfolios consisting of a variety of mutual funds. Changes in investments, while permitted, are generally limited to one per year.
  • One tax-free transfer or rollover of benefits from one 529 college savings plan to another for the same beneficiary is allowed during a 12-month period. The rollover must be completed within 60 days of the withdrawal.

A Look at 529 Prepaid Tuition Plans

A state’s 529 prepaid tuition plan generally allows donors to fund future education expenses— such as tuition and, in some instances, room and board— at specific in-state (typically public) colleges at current rates. This provides protection against rising higher education costs. Some plans provide additional benefits for state residents, and funding options range from one-time lump-sum contributions to monthly installment payments.

Talk to Your Financial Advisor

Your financial advisor should be able to provide you with more information about 529 plans, as well as other education funding options. A good advisor should help you evaluate the choices considering your overall investment goals, risk tolerance and time horizon.