529 Plans - College Savings Plans
Planning for Children's future Private School and College Expenses
What is a 529 Plan: A 529 College Savings Plan is a qualified tuition program, created by Section 529 of the Internal Revenue Code in 1996, which is operated by a state or educational institution. Savings plans allow participants to save money on behalf of a designated beneficiary for qualified higher education expenses (QHEE) or qualified education expenses (QEE). Your investment grows tax-deferred, and distributions to pay for the beneficiary's college costs are federal tax-free.
| Do 529 savings plans have income limitations? | There are no income limitations on a person’s ability to contribute to an account. |
| Who can be a beneficiary? | Any individual, including yourself, may be named as a beneficiary. The beneficiary must be a U.S. citizen or legal U.S. resident. A trust or other entity cannot be named as a beneficiary. |
| Is there a federal tax deduction for contributions? | No. Contributions to a 529 college savings plan are made with after-tax dollars. Some states offer a state tax credit or deduction for contributing. |
| What are the federal income tax advantages? | All contributions to 529 plans grow tax deferred; allowing 529 participants to take advantage of the power of tax deferred compounding. Distributions to pay for the beneficiary's college costs are federally tax-free. Please see the next page for what are considered “qualified higher education expenses” and “qualifed education expenses”. |
| Can someone else contribute to my 529 account? | Yes. Third party contributions (i.e. those made by non-owners), can be made via check written to the Plan, online, if the plan allows the account owner to share a link with online contribution instructions or purchase a Gift of College gift card. Please note that only the account owner can make decisions regarding the account, including taking withdrawals from the account, changing the account’s investments and changing the beneficiary. |
| What are the gift tax advantages of an account? | Contributions made to a 529 plan are considered present interest gifts. Normally, a gift of more than $16,000 (in 2022) to a single person in one year is subject to federal gift tax. However, with a 529 plan, you can make a gift of up to $80,000 in one year (or you and your spouse can make a joint gift of up to $160,000) without triggering the tax. To do this you must elect to treat the entire gift as a series of five equal annual gifts, and you may not make additional gifts during the five-year period. |
| Do I or the beneficiary have to live in the state to participate in that state’s plan? | No; generally, an individual may invest in any state’s plan and use the proceeds for any eligible educational institution in any state. However, favorable tax treatment for investing in a 529 College Savings Plan may be limited to investments made in a 529 plan offered by your home state. Some states do require that the participant or beneficiary be a resident to participate. Please consult your tax advisor, your advisor or contact your home state’s college savings plan to learn more about any state tax or other benefits that might be available in conjunction with an investment in your in-state 529 plan. |
| Can I change the beneficiary on the account? | Yes; the account owner can change the beneficiary at any time. To avoid federal income tax and a 10% federal tax penalty on earnings, the new beneficiary must be a member of the family of the previous beneficiary, as defined by federal tax law, which includes first cousins. If the new beneficiary is a generation lower than the old beneficiary, the change will be treated as a taxable gift by the old beneficiary to the new beneficiary. Generation-skipping transfer tax will apply if the new beneficiary is two or more generations lower than the old beneficiary. |
| Can I change the beneficiary on the account? | Yes; the account owner can change the beneficiary at any time. To avoid federal income tax and a 10% federal tax penalty on earnings, the new beneficiary must be a member of the family of the previous beneficiary, as defined by federal tax law, which includes first cousins. If the new beneficiary is a generation lower than the old beneficiary, the change will be treated as a taxable gift by the old beneficiary to the new beneficiary. Generation-skipping transfer tax will apply if the new beneficiary is two or more generations lower than the old beneficiary. |
| What can the funds be used for to be considered a qualified distribution? | Qualified higher education expenses (QHEE) at any accredited post-secondary institution include: tuition, mandatory fees, room and board (on or off campus, including living at the parent’s homeand the student must be attending school at least ½ time), books, supplies, equipment and computers, computer equipment, internet services and software required for enrollment. Under current law transportation or personal expenses are not considered QHEE, although they may be considered part of the “cost of attendance” for federal financial aid purposes. NEW: Qualified education expenses (QEE) include K- 12 tuition up to $10,000 annually per beneficiary at public, private or religious schools, fees, books, supplies, and equipment required for the participation of a designated beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act and distributions used to repay principal and/or interest on qualified education loans limited to $10,000 over a lifetime for a 529 plan beneficiary and $10,000 for each of the beneficiary’s sibling. NOTE: 529 plan distributions used to pay for K-12 tuition, apprenticeship programs and/or student loan debt come out federally tax free but may be treated as non-qualified at the state tax level if your state has not conformed to the new federal tax codes. A state may conform to one of these, but not all. Please check your state rules, your plans program description or tax advisor. |