How 529 plans may benefit you and your taxes
Your financial goals will change throughout your life. Take having kids: If you decide to add to your family, you may want to save for education, too. One easily accessible, simple way to do that is with a 529 college savings plan, which allows you to contribute as desired and has earning potential and tax benefits. Here’s what you need to know.
Types of 529 plans
|529 type||Used for||To note|
|529 college savings plans||Qualified education expenses such as tuition, room and board, mandatory fees, textbooks, and even computers||You designate how and where to spend the money, so it’s both more common and more flexible.|
|529 pre-paid tuition plans||Prepaid tuition and fees (in lump sums or installments) at today’s rates at eligible public and private colleges and universities||While you lock in prices and can cover up to five years of tuition, you cannot transfer the funds elsewhere. “That’s the downside; a lot are very state specific,” says Tyler De Haan, director of advisor consulting at Principal®.|
529 college savings plan benefits and features
|Are 529 plan contributions tax deductible?||Contributions are made with after-tax dollars. More than 30 states offer a full or partial tax deduction or credit for 529 plan contributions.|
|Are there other tax benefits to 529 plans?||Earnings grow on a tax-deferred basis, and you don’t pay federal taxes on 529 plan withdrawals when the money is used for qualified educational expenses.|
|What are 529 plan qualified education expenses?||Tuition, fees, books, computers and related equipment, supplies, special needs, room and board for half-time students, and up to $10,000 in tuition expenses at private, public, and religious K-12 schools (state dependent).|
|Who controls the 529 savings plan account?||The account owner, until the funds are withdrawn. (Other donors, such as grandparents, can also set up 529s.)|
|Can I change 529 beneficiaries?||Yes, to another child or grandchild—even for yourself if you’re going back to school.|
|Can 529 plans be used for education loans?||You can withdraw up to $10,000 (lifetime cap) from a 529 plan to pay principal and interest on a qualified student loan (including apprenticeship programs) for a 529 beneficiary.|
|Do 529 plans affect financial aid?||Maybe; it depends who owns the account. For example, if a parent is the account owner, up to 5.64% of the plan is assessed as a parental asset.|
Tip: What if your child doesn’t go to college, or doesn’t need all the funds you’ve saved? “You may have options but need to talk to your tax advisor about the implications,” DeHaan says. “Not all is lost.”
How 529 plan rules may vary by state
|Contribution limits||Range from $235,000-$520,000; may be considered gifts for federal tax purposes and count against the lifetime gifting exclusion if contributions are above the gift threshold|
|State tax advantages or other benefits||May depend on whether you’re a resident of the state that sponsors the plan|
|Investment options||Vary widely, including age-based investments|
|Fees and expenses||Vary greatly, even among plans offered within the same state|
4 ways to make the most of your college savings plan
- Check out your state’s 529 savings plans first. Tax breaks or waived fees may be lower for in-state residents.
- Start early and add often. Consider monthly contributions, even if they vary from year to year.
- Regularly review your progress. You may want to adjust each year based on how close you are to your savings goals.
- Talk to a financial professional about all the college savings choices available and the implications for your financial plan. “For example, a 529 plan may help minimize potential capital gains taxes,” De Haan says. If you don’t have a financial professional, we can help you find one.
Tyler Dehaan is a Principal Funds Distributor, Inc. Registered Representative.
Securities and advisory products offered through Principal Securities, Inc., 800-247-1737, Member SIPC, and/or independent broker/dealers. Principal Funds Distributor, Inc. and Principal Securities are members of Principal Financial Group®, Des Moines, IA 50392.