529 Plans

What is a 529?

A 529 is an investment account that can be created by families as a vehicle to save for college expenses. Each state regulates the accounts, but all of them are exempt from federal income tax. Most states also allow for a state tax deduction for 529 accounts. So basically, you have a tax-differed education savings vehicle and the distributions paid to your beneficiary are tax-free.

Although all interest is exempt from federal tax on 529’s, any withdrawals from the account must be used to pay for qualifying education expenses. Withdrawals for other reasons are subject to penalties as high as 10% on any interest generated.

529’s, or qualified tuition programs (QTPs), generally fall in to one of two categories.

1. Prepaid: These accounts are geared toward covering the costs of in-state tuition. The value of these accounts can also be transferred to private and out-of-state institutions.

2. Savings: These accounts are not attached to the schools in one state or a particular university.

Any investment in a 529 stays under the control of the investor – not the beneficiary. An investor designates the beneficiary when they open the account, and the beneficiary can be changed annually. There is a fairly broad definition of “family” when it comes to designating the beneficiary as well—step children, cousins, and spouses can qualify. Almost everyone qualifies to open a 529 and there is no income limit. Each person, as a beneficiary, can have up to $265,000 in their name.

It is important to remember that a 529 is not a federally insured investment account. There is risk. Money that is invested in a poorly performing plan with high expenses and low returns can— and will lose money.

Are you planning to go back to school after your child hits kindergarten? Then a 529 might be right for you too! Another unique element of the 529 is that you can be the person who opens the account and the beneficiary as well.

The 529 can be a great investment tool when you are planning ahead for college expenses. But it should only be one part of your tuition savings strategy. There are a number of vehicles available to save for college—explore them all as part of your financial plan.

This page and the information found on this website are for general informational purposes only and are in no way to be considered financial or legal advice. As with any topics discussed on this website, seek the assistance of professional advisors before making any decision or investment.