Created to help establish a funding source for higher education expenses, 529 plans offer unique estate-tax planning benefits as well as income-tax benefits. These plans may be established to benefit children, grandchildren, or other individuals, such as, nieces, nephews, and even nonfamily members.
In this section you will learn about 529 plans’ potential:
- Tax advantages
- Other benefits
529 plans give assets the potential to accumulate tax-deferred at the federal level and in most states. And when withdrawals are made to pay for tuition, room and board, fees, books, and supplies at any accredited post-secondary school that participates in the U.S. federal financial aid program, the earnings are generally federal-tax-free.
Another key feature is that you, the donor, may control the assets at all times. You can let the assets continue to accumulate tax deferred, withdraw the assets for college expenses, or change the beneficiary to another family member without penalty. You can also make withdrawals for nonqualified expenses, but those withdrawals would be subject to income taxes and a 10% penalty on the earnings. In addition, you not only determine the timing and amount of distributions but also you stay in control of the money (for example, if the beneficiary decides not to go to college).
529 plans are sponsored by the states, and if you participate in your state’s plan, you may enjoy state income tax benefits, which vary from state to state. Your tax advisor can provide more information.
529 college savings plan accounts are typically funded with annual exclusion gifts of up to $14,000. You can contribute up to $70,000 in one year per beneficiary, and your spouse or partner may do the same with no gift tax consequences. However, such a contribution would be considered a “five-year accelerated annual exclusion gift,” so you couldn’t make any additional annual exclusion gifts to that beneficiary for the next five years without potentially incurring gift tax implications. In general, the gift amount and subsequent earnings will not be included in your taxable estate. But if you should die within the five-year period, a prorated portion of the gift may be added back into your taxable estate. You can make additional gifts using your lifetime gift exclusion during the five-year period if you would like to continue or increase an existing gifting program. Talk to your tax advisor regarding the gift tax return filing for gifts to 529 plans.
Another feature is the ability to designate a successor owner for the plan. This enables a grandparent, for example, to establish a 529 plan account for a grandchild and designate the child’s parent or other individual as a successor owner when the grandparent dies. A parent or grandparent may also relinquish control during his or her lifetime if he or she wants the successor owner to take control sooner.
Please consider the investment objectives, risks, and charges and expenses carefully before investing in a 529 savings plan. The official statement, which contains this and other information, can be obtained by calling your Financial Advisor. Read it carefully before you invest.
An investment in a 529 plan will fluctuate such that an investor's shares when redeemed may be worth more or less than the original investment.
The availability of such tax or other benefits may be conditioned on meeting certain requirements. 529 plans are subject to enrollment, maintenance, and administrative and management fees and expenses. College savings plans offered by each state differ significantly in features and benefits. The optimal plan for each investor depends on his or her individual objectives and circumstances. In comparing plans, each investor should consider each plan's investment options, fees, and state tax implications.