The Top 7 Benefits of 529 Plans

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July 14, 2021

July 14, 2021

1. 529 plans offer unsurpassed income tax breaks.

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 in a 529 account, 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.

4. Low maintenance.

  • A 529 plan is a very hands-off way to save for education -to enroll,simply visit our Best 529 Plans page and select the plan you like best 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.

A good place to start:

See the best 529 plans, personalized for you

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.
  • In 2022, deposits to a 529 plan up to $16,000 per individual per year ($32,000 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.

7. Everyone is eligible 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 – $550,000.
  • Those looking to reduce estate taxes can elect treat a 529 plan contribution of between $16,000 and $80,000 as if it were made over a five calendar-year period to qualify for the annual gift tax exclusion.