529 Savings Plan

A 529 savings plan is a flexible, state-sponsored savings account that can be used to cover qualified primary, secondary, and college/postsecondary expenses in the United States and some foreign locations. These plans typically invest in portfolios of mutual funds. In addition, fixed income options may also be available, depending on the plan provider. Earnings in 529 plans are not subject to federal tax and in most cases state tax, as long as you use withdrawals for eligible education expenses, such as tuition and room and board. However, if you withdraw money from a 529 plan and do not use it on an eligible expense, you generally will be subject to income tax and an additional 10% federal tax penalty on earnings.

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 education 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 plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state.

Contributions

  • Up to the maximum account size (varies by program over $500,000)
  • No limit on income to contribute
  • No age limitation to contribute

Deductions

  • No federal deduction for contributions (state deductions vary by plan and account owner's state of residence)

Withdrawals

  • Account owner controls withdrawals
  • Proceeds must be used to cover expenses for primary, secondary, and college/postsecondary programs in the U.S. and qualifying foreign programs

Taxation

  • Account earnings are tax-deferred
  • Qualified withdrawals vary by the account owner's state of residence
  • Nonqualified withdrawals are taxed on the federal and state levels at the account owner's or beneficiary's rate, depending on to whom the 529 plan provider directs and reports the distribution
  • 10% penalty on earnings for nonqualified withdrawals

Other

  • Plans are assets of the account owner
  • Reduces federal aid by 2.6% to 5.64% of the 529 plan's value
  • Plan beneficiaries can be changed
  • 529 plan funds are removed from the donor's estate

 

Source: Raymond James MFRM-01630518