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Investment Ideas 2022: Explore three key themes dominating markets where investors might uncover potential opportunities. Read More

   

UNDERSTANDING 529 PLANS

Original Version on Marcus.com, adapted by Goldman Sachs Asset Management

6 Minute Read


 

What is a 529 Plan?

A 529 plan is a type of tax-advantaged investment account designed to help investors save money for certain education-related expenses. These plans, sometimes referred to as “qualified tuition programs,” are typically administered by states. In a 529 plan savings account, the account owner or investor can put money away to help pay for qualified education expenses. The beneficiary of the account can be the account owner, children, family members or anyone else selected by the owner.

 

 

How to Open a 529 Plan

States, as well as the District of Columbia, administer their own 529 plans, so plan rules, features and contribution limits will vary from state to state. When opening an account, an investor can contact the specific state agency that is in charge of the 529 plan or their financial advisor. The College Savings Plans Network (CSPN), an affiliate of the National Association of State Treasurers, has a resource center for those interested in learning more about the specifics of each state’s 529 plan(s). 

 

 

Choosing A 529 Plan

An investor may invest in their state plan or in an out-of-state 529 plan. However, not all 529 plans are equal and investors should do some comparison shopping to find the 529 plan that best suits their needs. There are also various tax implications that are important to consider depending on the investor’s state of residence.  

 

 

Who Can Open A 529 Plan?

US residents who are over the age of 18 can open an account with a US mailing address and a Social Security number. 

 

An account owner can name anyone as the beneficiary as long as they are a US resident or citizen and have a Social Security number. 

 

A 529 account can start accepting contributions as soon as it’s opened. Generally, the money in the account can grow tax-free. When an account owner is ready to use the funds, the money can be withdrawn tax-free, as long as it’s being used to cover qualified education expenses. 

 

 

What Are Qualified Education Expenses?

K-12 educational expenses (up to $10,000 per year per beneficiary), qualified higher education expenses such as college tuition, room and board, books, school supplies and computer equipment are qualified education expenses. 

 

In December 2019, Congress expanded the category of qualified educational expenses with the passage of the SECURE Act. Under the act, 529 savings plans can also be used to pay for registered apprenticeship schools and programs, and student loan repayments of up to $10,000.

 

 

Are There Contribution Limits to 529 Plans?

Contribution limits varies by state; the appropriate 529 plan state agency will have the complete and most up-to-date details of their contribution minimums and maximums. For tax purposes, 529 plan contributions are considered gifts, which means that the gift tax might apply to a contribution if it exceeds a certain amount.

 

 

Are There State Income Tax Benefits for Making 529 Plan Contributions?

Many states and the District of Columbia offer a state income tax deduction or credit, but benefits will depend on the account owner’s state of residency and which state plan they are enrolled in. Typically, to be eligible for the tax break, an account owner needs to be a resident of the state that sponsors the 529 plan. 

 

Some states offer a state income tax deduction to residents who make contributions to an out-of-state 529 plan. These states include: Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania. These states are often referred to as “tax parity states.” For more information on potential tax benefits by state, visit CSPN.

 

 

Are Contributions to 529 Plans Subject to The Gift Tax?

529 plan contributions are considered gifts, which are generally taxable. But the IRS provides an annual gift tax exclusion. This is the amount a person can give to others tax free each year. For example, for 2022 the annual gift tax exclusion is $16,000. This means that up to $16,000 can be contributed to a 529 Plan tax free in 2022. 

 

A professional financial advisor can best answer additional and specific 529 plan questions and help with enrollment into a 529 plan that best meets investor educational goals and needs.

 

 

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General Disclosures

This article was originally prepared by and approved by Marcus by Goldman Sachs® and revised by Goldman Sachs Asset Management, but is not a description of any of the products or services offered by and does not reflect the institutional opinions of Goldman Sachs Asset Management or any of their affiliates, subsidiaries or divisions.

This material is provided for educational purposes only. It is not an offer or solicitation to buy or sell any securities.

Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.

Investing involves risk, including the potential loss of money invested. 

Before investing in any 529 plan, you should consider whether you or the beneficiary’s home state offers a 529 plan that provides its taxpayers with favorable state tax and other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available through investment in the home state’s plan. You also should consult your financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plans’ features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.

Goldman Sachs does not provide legal, tax or accounting advice, unless explicitly agreed between you and Goldman Sachs (generally through certain services offered only to clients of Private Wealth Management). Any statement contained in this presentation concerning U.S. tax matters is not intended or written to be used and cannot be used for the purpose of avoiding penalties imposed on the relevant taxpayer. Notwithstanding anything in this document to the contrary, and except as required to enable compliance with applicable securities law, you may disclose to any person the US federal and state income tax treatment and tax structure of the transaction and all materials of any kind (including tax opinions and other tax analyses) that are provided to you relating to such tax treatment and tax structure, without Goldman Sachs imposing any limitation of any kind. Investors should be aware that a determination of the tax consequences to them should take into account their specific circumstances and that the tax law is subject to change in the future or retroactively and investors are strongly urged to consult with their own tax advisor regarding any potential strategy, investment or transaction.

The website links provided are for your convenience only and are not an endorsement or recommendation by Goldman Sachs Asset Management of any of these websites or the products or services offered. Goldman Sachs Asset Management is not responsible for the accuracy and validity of the content of these websites.

Confidentiality

No part of this material may, without Goldman Sachs Asset Management’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

Date of first use: July 1, 2022.

Compliance Code: 283734-OTU-1632262

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