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Name the top 7 benefits of 529 plansUpdated: 2015-01-02
Table of Contents
- What is a 529 plan?
- Are 529 plans only for my state's public colleges?
- Name the top 7 benefits of 529 plans
- Does a 529 plan affect financial aid?
- What is the penalty on an unused 529 plan?
- Are there gift & estate tax benefits for 529 plans?
- Can I have 529 plans from multiple states?
- Which is the best 529 plan available?
- What are the top-performing 529 plans?
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.
- In addition to the federal tax savings, 35 states, including the District of Columbia, currently offer residents a full or partial tax deduction or credit for 529 plan contributions.
- You can generally claim state tax benefits each time you contribute to your plan, so it's a smart idea to continue keep making deposits until you've paid your last tuition bill.
- Be sure to research all of your options. If your state doesn't offer benefits for residents, you can choose any other state's plan.
- Read More: Does this 529 plan rule leave you scratching your head?
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.
- 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