A brief history
529 plans were created by
Congress in 1996 and have been modified through the years by various pieces of legislation.
Known officially as
programs" or QTPs, 529 plans
are so named because
they are governed by
section 529 of the
Put your savings effort on autopilot
Consider linking your 529 savings plan to your bank account so you can easily make automatic monthly contributions.
529 College Savings Plans
plans are tax-advantaged
education savings vehicles
and one of the most
popular ways to save for
college today. They can also be used to save for K-12 tuition. Much like
the way 401(k) plans
changed the world
of retirement savings a
few decades ago, 529
savings plans have changed the world of education
Tax advantages and more
529 savings plans offer a unique combination of
features that no other education savings vehicle can match:
- Federal tax advantages: Contributions to a 529
account accumulate tax deferred and earnings are tax free if the money
is used to pay the beneficiary's qualified education
expenses. (The earnings portion of any withdrawal not
used for qualified education expenses is taxed at the recipient's rate
and subject to a 10% penalty.)
- State tax advantages: States are free to offer their own tax benefits to state residents, such as a tax deduction for
- High contribution limits: Most plans have lifetime limits of $350,000 and up (limits vary by state).
- Unlimited participation: Anyone can open a 529 savings plan account, regardless of income level.
- Wide use of funds: Money in a 529 savings plan can be used to pay the full cost (tuition, fees, room, board, books, supplies) at any accredited college or graduate school in the United States or abroad; for certified apprenticeship programs (fees, books, supplies, equipment); for student loan repayment (there is a $10,000 lifetime limit per 529 plan beneficiary and $10,000 per each of the beneficiary's siblings); and for K-12 tuition expenses up to $10,000 per year.
- Professional money management: 529 savings plans
are offered by states, but they are managed by
designated financial companies who are responsible for
managing the plan's underlying investment portfolios.
- Flexibility: Under federal rules, you are entitled to change
the beneficiary of your account to a qualified family member
at any time as well as roll over (transfer) the money in your account to a different 529 plan once per calendar year without
income tax or penalty implications.
- Accelerated gifting: 529 savings plans offer an estate
planning advantage in the form of accelerated gifting. This
can be a favorable way for
grandparents to contribute
to their grandchildren's education while paring down their own estate, or a way for parents to contribute a large lump sum.
Under special rules unique to 529 plans, a lump-sum gift of up to five times the annual gift tax exclusion amount ($15,000 in 2020) is allowed in a single year, which means that individuals
can make a lump-sum gift of up to $75,000 and married couples can gift up to $150,000. No gift tax will be owed,
provided the gift is treated
as having been made in
equal installments over a
five-year period and no
other gifts are made to that
beneficiary during the five
- Transfer to ABLE account: 529 account owners can roll over (transfer) funds from a 529 account to an
ABLE account without federal tax consequences. An ABLE account is a tax-advantaged account that can be used to save for disability-related expenses for
individuals who become blind or disabled before age 26.
Choosing a 529 savings plan
Although 529 savings plans are governed by federal
law, their implementation is left to the states. Currently, there
are over 50 different savings plans available because
many states offer more
than one plan.
You can join any state's
plan, but this variety
may create confusion
when it comes time to
select a plan. Each plan has its own rules and restrictions, which can change at any time. To make
the process easier, it
helps to consider a few
- Your state's tax benefits: A majority of states offer some
type of income tax break for 529 savings plan
participants, such as a deduction for contributions or tax-free
earnings on qualified withdrawals. However, some
states limit their tax deduction to contributions made to the
in-state 529 plan only. So make sure to understand your state's rules.
- Investment options: 529 savings plans vary in the investment
options they offer. Ideally, you'll want to find a plan with a
wide variety of investment options that range from conservative
to more growth-oriented to match your risk tolerance.
To take the guesswork out of picking investments
appropriate for your child's age, most plans offer aged-based
portfolios that automatically adjust to more conservative
holdings as your child approaches college age. (Remember, though, that any investment
involves risk, and past performance is no guarantee of
how an investment will perform in the future. The investments you choose may lose money or not perform well enough to cover college costs as anticipated.)
- Fees and expenses: Fees and expenses can vary widely
among plans, and high fees can take a bigger bite out of
your savings. Typical fees include annual maintenance
fees, administration and management fees (usually called
the "expense ratio"), and underlying fund expenses.
- Reputation of financial institution: Make sure that the
financial institution managing the plan is reputable and
that you can reach customer service with any questions.
- User experience: Is the plan's website easy to use? Can you easily take care of routine tasks online, such as set up automatic monthly contributions, change your contribution amount, research plan investments, find your rate of return, or request a withdrawal?
With so many plans available, it may be helpful to consult an
experienced financial professional who can help you select a
plan and pick your plan investments.
In fact, some 529 savings plans
are advisor-sold only, meaning you must go through a designated
financial advisor to open an account.
Once you've selected a plan, opening
an account is easy. You'll need to fill out
an application, where you'll name a
beneficiary and select one or more of the plan's investment
portfolios to which your contributions will be allocated. Also,
you'll typically be required to make an initial minimum contribution,
which must be made in cash or a cash alternative.
Thereafter, most plans will allow you to contribute as often as
you like. This gives you the flexibility to tailor the frequency of
your contributions to your own needs and budget, as well as to
systematically invest your contributions by setting up automatic monthly transfers from your bank account.
As for investment changes, beware that under federal law you are allowed to exchange your existing plan investments for new investments only twice per year. In other words, if your existing plan funds are currently invested in plan portfolios A & B but you want to change them to plan portfolios C & D, you can do this only twice per calendar year. However, you generally have unlimited say in how your future contributions will be invested.
You will also be able to
change the beneficiary of your 529 savings account to a qualified family
member with no income tax or penalty implications.
529 prepaid tuition plans — a distant cousin
There are actually two types of 529 plans — savings
plans and prepaid tuition plans. The tax advantages of each are the
same, but the account features are very different. A prepaid
tuition plan lets you prepay tuition at participating colleges, typically in-state public colleges, at
today's prices for use by the beneficiary in the future. 529 prepaid tuition plans are generally limited to state residents, whereas
529 savings plans are open to residents of any state. Prepaid tuition plans are much less common than savings plans.
Investors should consider the investment objectives, risks,
charges, and expenses associated with 529 plans before investing; specific plan information is available in each issuer's official
statement. There is the risk that investments may not perform well enough to cover college costs as anticipated. Also, before
investing, consider whether your state offers any favorable state tax benefits for 529 plan participation, and whether these benefits are contingent on joining the in-state 529 plan. Other state benefits may include financial aid, scholarship funds, and protection from creditors.
The information presented here is not specific to any individual's personal circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
This communication is strictly intended for individuals residing in the state(s) of AL, AK, AZ, AR, CA, CO, CT, DE, DC, FL, GA, GU, HI, ID, IL, IN, IA, KS, KY, ME, MD, MA, MI, MN, MS, MO, MT, NE, NV, NH, NJ, NM, NY, NC, ND, OH, OK, OR, PA, RI, SC, SD, TN, UT, VT, VI, VA, WA, WV, WI and WY. No offers may be made or accepted from any resident outside the specific states referenced.
|Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2020.