Educational Savings

529 Educational Plans

529 plan contributions aren’t deductible for federal income tax purposes, but many state plans offer state income tax deductions for contributions. Earnings grow tax free. When used for qualified education expenses, distributions are federally tax free. 529 plans offer tax benefits regardless of how much income the account owner has.
Some options for saving for education (such as Coverdell accounts or education savings bonds) are subject to income limitations to receive the tax benefits, while others (such as taxable accounts and custodial accounts) don’t offer tax benefits. 529 funds are one way to fund the beneficiary’s education and may be able to offset some or all their educational expenses.

Ownership of account

Account ownership is determined by whomever establishes the account (generally a parent) and maintains control over the funds.

Beneficiary changes

The account owner may change the beneficiary to another eligible family member, such as a sibling.

Investment options

Money contributed to a 529 plan can be invested, for example, in mutual funds, exchange-traded funds, or target date funds, to allow for potential growth over time. As with any investment, a 529 plan can experience market fluctuations that may affect its value when redeemed.

Contribution limits

Contribution limits are set by the state offering the plan, and all 529 plans prohibit contributions once the account balance reaches a certain point, typically more than $235,000. The actual amount varies depending on the plan. Some states that offer a state income tax deduction for contributions may limit the amount of annual contributions that can be deducted. Additionally, contributions are treated as gifts, so most people will want to stay within the annual gifting limit.

Who may make contributions?

Anyone can contribute to the account. This includes, the account owner, grandparents, family friends, parents and others, regardless of their income. Contributions from friends and family members are treated as gifts to the beneficiary.

- A 529 education savings plan is considered a parental asset, whether it’s owned by the parent or the dependent student. That means it should have a relatively low impact on a student’s financial aid.
- Parental assets above a small threshold may reduce student aid.
- If your child receives a scholarship, you can withdraw up to the scholarship amount from the 529 plan penalty-free. However, the earnings will still be taxable. To avoid taxation, see if you can use the funds for other qualified expenses such as room and board, housing and textbooks.
- Your child may still qualify for eligible reimbursement from the 529 plan depending on the type of program or certification. Review your specific 529 eligible expenses to determine what qualifies for reimbursement
- If your child doesn’t not pursue an activity that qualifies for reimbursement, you have the option to change the beneficiary of the account to an eligible family member.
- If distributions are used for nonqualified expenses, earnings are subject to federal taxes and a 10% penalty.
- States may also impose taxes and penalties.
- Speak with your financial advisor to help make sure you’re not overfunding your plan.
- Each 529 plan will offer its own range of investment choices. These options will often include mutual funds, exchange-traded funds and age-based or target-based portfolios.
- As with any investment account, consider how you feel about risk, the amount of time you have before withdrawing the funds and the return objectives you have for the 529 plan. Remember, you can only change your current 529 plan investments twice per calendar year or when changing the beneficiary.
- Tuition and fees
- Books
- Required school supplies
- Room and Board- the beneficiary must be at least a half-time student, includes off-campus house up to the cost of on-campus room and board
- Computers and related accessories, such as printers, internet access and educational software primarily used by the beneficiary

Before investing, carefully consider the plan’s investment objectives, risks, charges, and expenses.

Consider before investing whether your or the beneficiary’s home state offers a 529 plan that provides its taxpayers with state tax and other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available in such state’s qualified tuition program.

Tax and financial aid treatment of 529 plans is subject to change. As with any investment, it is possible to lose money by investing in this plan

Qualified education expenses can include tuition, fees, books, supplies, equipment, and room and board. Certain costs associated with K-12 tuition, participation in a registered apprenticeship program, or payment of a qualified education loan up to $10,000 may also be considered qualified educational expenses. The availability of tax or other benefits may be conditioned on meeting certain requirements, such as residency, purpose for or timing of distribution, or other factors. Clients should consult a qualified tax advisor to discuss their individual situation.