Saving for college is an important consideration for every parent. Although it may be overwhelming to think about, it’s never too early to start saving – especially with the tax-free benefits of a 529 plan.
What is a 529 Plan?
Also know as a Qualified Tuition Program, a 529 plan is a tax-free investment account used for a beneficiary’s qualified higher education expenses. 529 plans are state authorized and therefore vary between states.
What are the tax benefits?
Within a 529 plan, the earnings on your investments accumulate tax free. Distributions are also tax-free so long as they are used for qualified higher education expenses. In other words, the contributions inside the plan grow tax-deferred and the corresponding gains are never taxed.
Who can be a beneficiary and who can contribute to the beneficiary’s plan?
You can open a 529 plan for any person (including yourself). In California, any adult can contribute to a 529 plan and can contribute to any beneficiary’s plan.
How much can I contribute to a 529 plan?
You can contribute up to $14,000 per year ($28,000 per couple) per beneficiary without gift tax consequences. You can contribute up to 5 years in advance for a total $70,000 in one year ($140,000 per couple).
What is a “qualified higher education expense”?
A beneficiary attending a qualifying postsecondary institution can use the distributions to pay for tuition, room and board, books, fees, supplies, and equipment. Funds withdrawn for any non-qualifying purpose are subject to income tax and a 10% penalty on the portion of the distribution attributable to the gain on investment.
What if the beneficiary doesn’t spend all of the money in the plan?
You may change the beneficiary on the account at any time so long as the new beneficiary is a member of the former beneficiary’s family, as defined by the State. There are gift tax implications for transfers made to a new beneficiary at least one generation younger than the former beneficiary.
Are there different kinds of 529 plans?
There are prepaid tuition programs and savings programs. Prepaid tuition programs allow you to purchase “tuition credits” for future education, usually at a particular institution. For example, you may purchase one semester’s tuition credit today to be used when the beneficiary starts attending. Those credits will be good for one semester’s worth of education regardless of how much tuition costs have risen by the time the beneficiary goes to school. The savings plans is simply an investment account that will be available for future educational expenses.
What else should I know?
California does not offer tax benefits to its residents – such as tax deductions or credits – for contributing to a California sponsored 529 plan. Therefore, one should also consider other state sponsored plans that may offer different or less expensive investment choices. You are free to use a 529 plan of any state. An investment professional can help you decide which plan, and which investments within the plan, are right for you.
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The information in this post is for informational purposes and should not be treated as tax advice. The 529 plan is one of many ways to save for postsecondary education. Please consult a tax or investment professional for more information.