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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.
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).
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.
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 When an account owner is ready to use the funds, the money can be withdrawn tax-free, as long as it’s being used to cover qualified education expenses.
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.
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.
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.
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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