529 plans are tax-advantaged investment vehicles designed to encourage and support families and individuals looking to save money with the intention of using it to pay for future education. 529 savings plans are named after section 529 of the Internal Revenue Code and are sponsored on a case-by-case basis through individual states.
529 plans are divided into two types—education savings plans and prepaid tuition plans. Nearly every state in the U.S., as well as the District of Columbia, offers its own plan. While you may open an account across state borders, there can be significant state tax advantages and other benefits for investors who choose 529 plans in their state of residence.
The funds in a 529 plan can be used for any eligible postsecondary educational institution within the U.S., as well as many overseas, for qualified expenses. These include tuition, fees, books, computer equipment and software, and supplies for attendance. Room and board can also qualify for students who are at least enrolled half-time. Following the Tax Cuts and Jobs Act of 2017, K-12 public, private, and religious school tuition is now included as a qualified expense for 529 plans. This addition allows distributions from 529 plans to be used to pay up to a total of $10,000 of tuition per beneficiary (regardless of the number of contributing plans) each year.
Key Benefits of a 529 Plan
Tax-Free Qualified Distributions
Beneficiaries of 529 plans can access their funds tax free in most cases, though some states may have different laws than the federal regulations.
No Income Limits
There are no upper- or lower-income limits for contribution and participation in 529 plans, which allows higher income families to benefit from them as well.
Large Contribution Amounts
There are also significantly high contribution limits, particularly compared to ESA, while the account balance limits can vary from state to state.
Rules, Restrictions, and Traits of 529 Plans
529 education savings plan contributions can only be made in cash, and they are generally invested in a pre-determined portfolio of stocks, bonds, and securities. Beneficiaries of a 529 plan can be changed without any tax consequences, as long as the new beneficiary qualifies as a sibling, descendant, ancestor, aunt, uncle, or first cousin. 529 plans are also flexible in that some vocational schools are also eligible for distributions to be used as qualifying expenses.
It’s important to note that a 529 account could affect the beneficiary’s ability to receive financial aid.
Want to learn more about 529 plans? Contact us today to discuss 529 plans and other educational savings opportunities.
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