If you find yourself intimidated by the ever-rising price of higher education, then a 529 college savings plan might be a key component in saving for a college education. A 529 college savings plan is a tax-advantaged way to save for college and pay for higher education expenses. Unlike some other savings vehicles, a 529 college savings plan may allow you to make sizeable contributions. The funds may generally be used for any qualified college or higher education expense, including tuition, room, board, fees, books, supplies, and equipment. Tax benefits may be subject to certain restrictions.
Money in a 529 college savings plan grows tax deferred. And you may be able to withdraw the money without having to pay federal and state income taxes-depending on the plan and where you live-as long as it's used to pay for qualified, higher-education expenses.1If the money from 529 college savings plans is used for other purposes, the earnings portion of a withdrawal is subject to ordinary federal income tax, an additional 10% federal tax, and any applicable state income taxes. 529 college savings plans may also affect a student's eligibility for financial aid.
Types of 529 Plans
Although many details of 529 college savings plans vary by state, they generally come in two forms:
Gift Tax and Estate Tax Benefits
529 plans are partially exempt from the gift tax. You can contribute up to $14,000 ($28,000 for married couples) annually2per beneficiary, or up to $70,000 ($140,000 for married couples) over a five-year period, without triggering the gift tax.
Keep in mind that your gifts are excluded from your estate, so investing in a 529 Plan can be a smart strategy to reduce your estate tax.
Funds may be withdrawnwithout penalty if the beneficiary receives a scholarship (withdrawals can be made up to the scholarship amount), or in the event of the death or disability of the beneficiary. Ordinary federal and state income taxes would be owed on any investment earnings included in gross income.