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COLLEGE SAVINGS 101

Name the top 7 benefits of 529 plansUpdated: 2015-01-02

1) 529 plans offer unsurpassed income tax breaks.

  • Although contributions are not deductible, earnings in a 529 plan grow federal tax-free and will not be taxed when the money is taken out to pay for college.
  • Other savings vehicles, such as mutual funds, will give up a portion of their earnings to annual income taxes and also get hit with a capital gains tax at withdrawal.
  • This has been a huge incentive for Americans to save for college. The tax treatment was made permanent with the Pension Protection Act of 2006.
  • Read More: 529 plans and their tax benefits are here to stay

2) Your own state may offer tax breaks as well.

3) You, the donor, stay in control of the account.

  • With few exceptions, the named beneficiary has no legal rights to the funds so you can assure the money will be used for its intended purpose.
  • This differs from custodial accounts under UGMA/UTMA, where the child takes control of the assets once he or she reaches legal age.
  • A 529 account owner can withdraw funds at any time for any reason -- but keep in mind that the earnings portion of non-qualified withdrawals will incur income tax and an additional 10% penalty tax.
  • Read More: Eight reasons why grandparents love 529 plans

4) Low maintenance

  • A 529 plan is a very hands-off way to save for college - to enroll, simple visit the plan's website or contact your financial advisor.
  • Most plans allow you to "set it and forget it" with automatic investments that link to your bank account or payroll deduction plans.
  • The ongoing investment management of the account is handled by an outside investment company hired as the program manager or by the state treasurer's office.
  • Read More: 5 simple steps to enrolling in a 529 plan

5) Simplified tax reporting

  • Contributions to a 529 plan do not have to be reported on your federal tax return.
  • You won't receive a Form 1099 to report taxable or nontaxable earnings until the year you make withdrawals.
  • Deposits to a 529 plan up to $14,000 per individual per year ($28,000 for married couples filing jointly) will qualify for the annual gift tax exclusion.

6) Flexibility

  • You can change your 529 plan investment options twice per calendar year.
  • You can rollover your funds into another 529 plan one time in a 12-month period.
  • Hint: There is no federal limit on the frequency of these changes if you replace the account beneficiary with another qualifying family member at the same time.
  • Read More: The magic of beneficiary changes

7) Everyone is eligible to take advantage of a 529 plan.

  • Unlike Roth IRAs and Coverdell Education Savings Accounts, 529 plans have no income limits, age limits or annual contribution limits.
  • There are lifetime contribution limits, which vary by plan, ranging from $235,000 - $400,000.
  • Those looking to reduce estate taxes can elect to treat a 529 plan contribution of between $14,000 and $70,000 as if it were made over a five calendar-year period to qualify for the annual gift tax exclusion.
  • Read More: 10 rules for superfunding a 529 plan