A 529 savings plan is a valuable education savings tool because it offers flexible, tax-deferred ways to save. 529 plans also offer many other benefits when compared to other savings vehicles:
- States may allow contribution deductions from state income taxes.
- Earnings are free from federal taxes if used for qualified education expenses.
- In most states, earnings are free from state taxes if used for qualified education expenses.
- You – rather than your child – remain in control of the funds.
- Generous contribution limits exist, regardless of income level.
- You choose the investment strategy that is right for you and your student.
- You can contribute to a 529 savings plan and a Coverdell Education Savings Account during the same year.
- Your child may choose any primary and secondary (or K-12) public, private or religious education, accredited college, university or vocational school.
- The account may be transferred to another family member.
- Contributions are typically excluded from your taxable estate and may not be subject to gift taxes.
- Some states may provide creditor protection. It is important to review each plan and state laws to determine if they allow creditor protection.
However, there are some considerations to keep in mind:
- Earnings are taxed and subject to 10% penalty when withdrawn for uses other than qualified higher education expenses.
- The portfolio allocations may only be changed once per year or upon a change in beneficiary.
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Source: Raymond James
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Rules and laws governing 529 plans are varied and subject to change. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state.
Certain changes in beneficiary may result in a taxable event. Tax-free withdrawals may be made for qualified education expenses. Otherwise, the deferred earnings portion may be subject to taxes and a 10% penalty. Please consult a qualified tax professional to discuss tax matters.
