What’s a 529 savings plan?
A 529 plan is a financial tool that helps you plan and save for qualified higher education expenses at eligible educational institutions, like colleges, universities, community colleges and trade schools.
There are two basic 529 plan options:
- prepaid tuition program allows families to prepay for future in-state public college tuition and mandatory expenses
- savings program features a variety of options including investment accounts and FDIC-insured savings accounts and can be used to pay qualified higher education expenses, including tuition, fees, textbooks, room and board, supplies and equipment
Currently offered by 49 states and the District of Columbia, 529 plans get their name from Section 529 of the Internal Revenue Code, which established federal tax advantages for qualified college savings plans.
Upon withdrawal, earnings are tax free when used for qualified higher education expenses. In addition, some states like Virginia, offer income tax benefits for those who contribute to a 529 plan.
The individual who opens the 529 account, not the actual beneficiary, retains full control of their 529 money.
Funds in 529 accounts can be rolled over to another state’s 529 plan – and can be withdrawn at any time for any purpose.
Withdrawals not made for qualified higher education expenses carry a 10 percent federal penalty on earnings with certain exceptions for a beneficiary receiving a scholarship, becoming disabled, or passing away. There are also federal and state income taxes on the earnings reported on the taxpayer’s return and possible recapture of state tax deductions previously taken on the amount of the withdrawal if not made for qualified higher education expenses.
Unlike other college savings methods, 529 plans do not have income restrictions.
The maximum savings amount is substantial – in Virginia, for example, currently up to $500,000 can be deposited in 529 accounts for each student.