529 Plans for College Savings

What is a 529 Plan?

A 529 Plan refers to a tax-deferred college savings plan, generally administered by states, state agencies and educational institutions. It is named after Section 529 of the Internal Revenue Code, which created these types of accounts. Every state currently offers their own 529 Plan.

529 Plans are usually classified as pre-paid tuition or college savings plans:

Pre-paid 529 Plans

Pre-paid 529 Plans, or Prepaid Tuition Plans, allow families to purchase credits at participating colleges and universities for future tuition at today’s rates. Some plans also permit you to purchase credits for room and board as well. Pre-paid 529 plans allow you to save money on tuition inflation, as most states guarantee to increase your plan’s value at the same rate as tuition increases.

529 College Savings Plans

529 College Savings Plans operate very similarly to a 401k investment in that your money is invested in various funds and subject to market conditions. Before investing in a 529 College Savings Plans, decide what level of risk you are willing to accept and check with your plan administrator to see what types of funds are available. Most plans will offer a variety of funds for you to choose from.

529 Plan Benefits

• Although 529 contributions are not deductible on your federal tax return, you will not be taxed on the growth of your investment. In addition, your withdrawals are tax-free, provided they are used for qualified educational expenses.
• If you invest in your own state’s 529 plan, some states offer tax deductions on your state tax return.
• 529 Plans allow you to contribute large amounts, generally up to $300,000 depending on your state plan.
• The donor retains a high amount of control over the plan (i.e. if the beneficiary decides not to go to college, they have no access to the funds).
• Friends and family members can contribute to the 529 Plan as well.
• 529 plans provide favorable federal estate and gift tax provisions.

We’ve highlighted some of the benefits of 529 college savings plans above. For more detailed information on tax benefits, please consult the IRS website or your tax advisor.