A 529 plan is a tax-advantaged education savings vehicle operated by a state, state agency or educational institution that enables families to set aside funds for future college expenses. Authorized by Congress in 1996, 529 plans, or “qualified tuitions plans,” are named after Section 529 of the Internal Revenue Code which governs these savings plans. Similar to how 401(k) plans changed retirement savings a few decades ago, 529 plans changed the world of college savings.
Tax advantages and more
529 college savings plans offer some unique features:
- Federal tax advantages: Contributions to your account grow 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 college expenses is taxed at the recipient’s rate and subject to a 10% penalty.)
- State tax advantages: Many states offer income tax incentives for state residents, such as a tax deduction for contributions or a tax exemption for qualified withdrawals.
- High contribution limits: Many plans let you contribute over $300,000 over the life of the plan.
- Unlimited participation: Anyone can open a 529 college savings plan account, regardless of income level.
- Professional money management: These savings plans are managed by designated financial companies responsible for managing the plan’s underlying investment portfolios.
- Flexibility: Federal rules allow you to change the beneficiary to a qualified family member at any time and rollover the money in your account to a different 529 plan once per year without income tax or penalty implications.
- Wide use of funds: Use money in a 529 college savings plan at any college in the U.S. or abroad accredited by the Department of Education.
- Accelerated gifting: 529 plans offer an estate planning advantage, providing grandparents with a way to contribute to their grandchildren’s education. A lump-sum gift of up to five times the annual gift tax exclusion ($14,000 in 2016) is allowed in a single year, which means that individuals can make a lump-sum gift of up to $70,000 and married couples can gift up to $140,000. 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 years.
Selecting a plan
Currently, over 50 different college savings plans are available. While you may join any state’s 529 college savings plan, each has its own rules and restrictions, which can change at any time. Consider a few key features:
- Your state’s tax benefits: A majority of states offer some type of income tax break for 529 college savings plan participants, such as a deduction for contributions or tax-free earnings on qualified withdrawals. Some states limit their tax deduction to contributions made to the in-state 529 plan only.
- Investment options: Look for a plan with a range of investment options 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 adjust to more conservative holdings as your child approaches college age. (Any investment involves risk, and past performance is no guarantee of how an investment will perform in the future.)
- Fees and expenses: These vary among plans. Typical fees include annual maintenance fees, administration and management fees (or “expense ratio”), and underlying fund expenses.
- Reputation of financial institution: Make sure that the financial institution managing the plan is reputable.
With so many plans available, consider consulting an experienced financial professional to help you select a plan and choose plan investments that are right for your family.
For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Past performance is not indicative of future results. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000. Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.