7 Reasons Why You Should Invest in a 529 Plan


529 Plans Let You Give Your Child or Grandchild the Gift of a Higher Education

by Community Manager JosephMontanaro | Retired, Army | San Antonio, TX | ‎11-30-2015

Piggy bank graduation hat-shutterstock_44515120.jpgEducation may not be top of mind entering the holiday season, but with the cost of a bachelor’s degree from a public university nearing six figures, maybe it should be.

If you’re looking for a gift with staying power, consider one to help your child or grandchild offset those skyrocketing costs.

Specifically, I’m talking about 529 college savings plans. These tax-advantaged plans offer a unique way to save for college. They’ve been around for about  20 years, and while most are sponsored by individual states, you can use the money you accumulate at a college anywhere in the country.

Share the Gift of Education

Invest in a 529 Plan.

Whether you’re considering setting up a 529 for your own child or contributing to an account for your grandchild, here are seven things to understand:

  • Big tax benefits. The account is tax-deferred, and you won’t pay federal income tax on withdrawals, neither on what you contributed nor the earnings, assuming the money is used for qualified higher education expenses. More on that later.
  • Low entry and high contribution limits. Typically, you can set up an account with as little as several hundred dollars and add as little as $25 on any occasion. On the other hand, most plans let you accumulate up to several hundred thousand dollars for the beneficiary.
  • Flexibility. You can change the beneficiary to another eligible family member and if the money goes unused, it reverts to the account owner. Note, however, that earnings on “non-qualified” withdrawals would be subject to income taxes and a 10% penalty.
  • Turnkey investment options. With premixed static portfolios and age-based portfolios that become more conservative as the beneficiary nears college age, most plans offer investment possibilities that won’t eat up a lot of your time.
  • Favorable financial aid treatment. Plans owned by the student or parent both receive favorable treatment as parental assets in calculations for federal financial aid. This means using a 529 savings plan is unlikely to limit the student’s access to needs-based grants, scholarships or loans. One caution: Withdrawals from accounts owned by grandparents or other third parties are considered untaxed income to the student and can negatively affect eligibility for financial aid, so you may want to steer clear of that approach.
  • State income tax savings. Some states offer state income tax deductions for 529 contributions.
  • They aren’t for everyone. If you’re looking to save for expenses outside of what the IRS considers “qualified,” these plans may not be for you. Generally, qualified higher education expenses in this context include tuition, fees, books and supplies, room and board (with limitations). Unlike some other saving options, 529 plans are limited to higher education, so expenses for elementary or secondary school or even transportation would not be considered qualified.

Learn more about the advantages and limitations of 529 plans by checking out IRS Publication 970. This year, as you’re ramping up for the holidays, consider a gift that will help your family steer clear of the student loan crisis.

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Additional Disclosure:

The contents of this document are not intended to be, and are not, legal or tax advice. The applicable tax law is complex, the penalties for non-compliance are severe, and the applicable tax law of your state may differ from federal tax law.  Therefore, you should consult your tax and legal advisers regarding your specific situation.