Features and Benefits
Tax Advantages
There are some valuable tax benefits that accompany 529 plans. They offer tax-deferred growth, which means any earnings on contributions you make are federal tax-free.1 Those earnings reinvested can make a difference over time. A 529 college savings plan also entitles you to federal tax-free distributions for certain qualified expenses. Some examples of qualified expenses include tuition, fees, books, supplies, on-and off-campus room and board and even certain expenses for special needs students.
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Estate & Gift Tax Benefits
Not only does a 529 college savings plan help you afford the increasing cost of a college education, but it also provides the opportunity to remove significant assets from your taxable estate while continuing to maintain control over your assets. Under the annual federal gift tax exclusion, you can contribute up to $65,000 (or $130,000 if married and filing jointly) to a 529 plan immediately and average the contribution equally over a five-year period without incurring a federal gift tax.1
Friends and family can also contribute to a loved one’s 529 plan while removing taxable assets from their estate.
Flexibility & Control
529 college savings plans allow you to maintain flexibility and control over your assets. You, the account holder, decide when to take distributions for various qualified college expenses covered by a 529 plan, and how much money to spend, and to whom the check should be made payable. You also have the freedom to change the beneficiary at any time to another family member. This is a great benefit if your loved one’s college plans change and you would like to transfer the 529 plan to another family member of the current Beneficiary.
Investment Options
Most 529 plans offer a variety of investment options and individual fund choices that best suit your investment style and risk. The Enrollment-based portfolio is one popular type of investment option. This type of portfolio allows you to invest in a 529 plan and the portfolio automatically reallocates according to the years until the prospective student expects to go to college. Traditionally, these portfolios start with more aggressive allocations that adjust to become more conservative as college approaches. There are also other portfolio options available that may better suit your individual needs. Some of these options include individual portfolios which usually have specific objectives and are often used to create a customized investment strategy.
State Tax Benefits
Certain 529 plans offer some type of state tax deduction when residents invest in their own state’s plan. These potential state tax deduction amounts vary greatly and should be considered along with other suitability factors such as performance and investment options when choosing a 529 plan.
General Benefits
529 savings plans also offer several other benefits not offered by other college savings investment vehicles. There are no age or income limitations, providing greater flexibility for people who fund 529 savings plans and those who are the beneficiaries. And contribution limits are often quite generous, with most states’ limits exceeding $300,000 per beneficiary. And accounts have the potential to grow even higher with earnings.
There are many benefits to 529 college savings plans. You should consider all the alternative investment options available and decide what vehicle is right for you.
1 State tax laws and treatment may vary. Earnings on non-qualified distributions will be subject to income tax and a 10% federal penalty tax. Please consult your tax adviser for more information.