A 529 plan is a tax-advantaged savings plan designed to help families save for future college expenses.

The money you save into a 529 plan can be used to offset college tuition, and other qualified education expenses at any eligible institution, including colleges, universities, vocational schools, and apprenticeship programs.

Benefits of a 529 Plan Include:

  • Contributions are made with after-tax dollars, and earnings grow tax-deferred, unless a state income tax deduction applies.
  • Withdrawals from the 529 plan used to pay for qualified education expenses are tax-free.
  • 529 plans offer tremendous flexibility in how to utilize the funds for college costs.

Below we answer some of the most common questions we hear about 529 plans to help you understand the benefits and how to choose the right plan for your family.

How do 529 plans work?

When you contribute to a 529 plan, your funds are invested across various investment options, such as mutual funds or ETFs. The earnings generated by these investments grow tax-free as long as the funds are used for college costs such as tuition, room and board, books, supplies, and certain equipment.

How do I choose a 529 Plan for college savings?

When determining the best 529 plan for your family, consider the following:

Fees: The fees charged by a 529 plan can differ. It is important to compare the fees charged by different plans before selecting one.

Investment options: Each 529 plan offers various investment options. Choose a plan that offers options aligning with your risk tolerance and investment goals.

State tax benefits: Some states provide tax breaks for contributions to 529 plans. If your state offers such breaks, consider a 529 plan offered by your state.

What are the tax benefits?

One of the main advantages of 529 plans is their tax benefits. Contributions aren’t deductible on your federal tax return, but some states offer state income tax deductions or credits for contributions. Moreover, any earnings in the 529 plan are free from federal income tax or capital gains tax when used for college tuition and other qualified expenses.

Are there contribution limits for 529 plans?

Yes, each state sets its own contribution limits, which can vary significantly. Most states have high limits, often in the hundreds of thousands of dollars. Be aware that contributions above a certain amount may be subject to gift tax implications.

Can I withdraw money from a 529 plan at any time?

Yes, you can withdraw money from a 529 plan at any time. However, if the funds aren’t used for qualified education expenses, you may face income tax on the earnings portion of the withdrawal, along with a 10% federal penalty tax.

Make sure to plan your withdrawals carefully to maximize the benefits of the plan.

Does a 529 plan affect financial aid eligibility?

When it comes to financial aid eligibility, 529 plans are considered an asset of the account owner, this is usually the parent or guardian.

While 529 plans can impact financial aid, the effect is typically less significant than other assets like savings accounts or investments held under the student’s name.

Can I change the beneficiary?

Yes, you can change the beneficiary of a 529 plan. Here are some scenarios:

If the original beneficiary of the 529 plan receives a scholarship or opts not to attend college, you can change the beneficiary to another eligible family member. This could be siblings, cousins, nieces, nephews, or even yourself.

If your elder child, who was the beneficiary, has completed their college education and there’s money left in the plan, you can switch the beneficiary to a younger child.

What happens if I don’t use all the money in a 529 plan?

If your child completes college before using all the funds in your 529 plan, you can assign a younger child as the new beneficiary.

This allows your funds to continue growing within the 529 plan. If needed, you can make additional contributions for the future college costs of your younger child.

SECURE Act 2.0

Beginning in 2024, the SECURE Act 2.0 will allow people to transfer excess 529 money to a Roth IRA. Here are a few considerations:

The owner of the Roth IRA must be the beneficiary of the 529 plan.

The lifetime transfer limit is $35,000 per beneficiary.

Transfers are subject to Roth IRA contribution limits, currently $6,500/year.

Your 529 account must have been open for at least 15 years.

If you are considering transferring excess 529 funds, it is best to speak with a financial advisor to determine if it is the right decision for you.

Are 529 plans only for in-state colleges?

No, 529 plans can be used to pay for qualified education expenses at eligible institutions nationwide. This includes both in-state and out-of-state colleges, universities, and vocational schools.

Can I have more than one 529 plan?

Yes, you can have multiple 529 plans. While you can only have one 529 plan account per beneficiary, you can open separate accounts for different beneficiaries, optimizing your savings strategy and fund allocation.

Are there any risks associated with investing in a 529 plan?

While the primary purpose of a 529 plan is to grow your college savings over time, it’s crucial to remember that it’s an investment vehicle and market performance can never be guaranteed.

529 plans offer a range of investment options, such as mutual funds or exchange-traded funds (ETFs), each with its own level of risk and potential return. Options with higher potential returns may also come with higher levels of risk. Carefully consider your risk tolerance, investment goals, and time horizon when selecting investment options. Working with a financial advisor can be beneficial in this process.

Is a 529 plan right for your family?

Opening a 529 plan can be a smart move for families looking to save for their children’s future education. With tax advantages, potential investment growth, and flexibility, a 529 plan is a powerful tool for college planning. Start early, automate your contributions, and watch your college savings grow.

Whether you’re a parent, grandparent, or guardian, a 529 plan can help give the children in your family the priceless gift of education.