Invest in Your Future: Maximize Your 529 Tax Benefits

Saving for college is a big financial commitment, and families today are more interested than ever in finding smart ways to make the most of their savings. That’s where the 529 savings plan comes in—an investment account specifically designed to help save for qualified education expenses. We’ll walk you through the 529 tax benefits, explain the different types of plans, and offer strategies to make the most of these savings. If you’re looking for a way to grow your college savings without the tax burden, a 529 savings plan could be just the tool you need.

What is a 529 College Savings Plan?

A 529 savings plan is a tax-advantaged investment account that makes it easier for families to save for college and other educational expenses. These plans come in two main forms: the college savings plan and the prepaid tuition plan.

  • College Savings Plan: This type of plan allows families to invest contributions in a range of investment portfolios, similar to a retirement account. The funds grow tax-free, and you can use them to cover a variety of qualified education expenses at any eligible educational institution. All 50 states offer access to a 529 College Savings Plan.
  • Prepaid Tuition Program: This plan lets you lock in current college tuition rates for a specific in-state college or university. It’s a hedge against future tuition expense hikes and is a great option for families who know where they want their child to attend school. Currently, only 9 states offer prepaid tuition plans: Florida, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas, Virginia, and Washington. In addition, Private College 529 offers prepaid tuition at nearly 300 colleges and universities.

529 Tax Benefits

The 529 plan’s tax advantages make it stand out as a college savings option.

Here’s how the tax benefits work:

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1. Tax-Free Earnings Growth

Any earnings in a 529 college savings plan grow tax-free. Unlike a traditional savings account where you pay taxes on interest earned, a 529 account’s earnings are untaxed as long as when they are withdrawn, they’re used for qualified education expenses.

2. Tax-Free Withdrawals for Qualified Education Expenses

When you use the funds for qualified higher education expenses you won’t owe any federal taxes on your withdrawals. Qualified expenses also include costs for vocational schools and apprenticeship programs registered under the National Apprenticeship Act, making the 529 plan flexible for various education paths.

Here’s a quick list of some qualified education expenses. The list of what a 529 plan can pay for, tax-free changes almost yearly due to the SECURE Act.

3. Gift Tax Exclusion

Each year, you’re allowed to give someone up to $18,000 without paying any gift tax (up to $36,000 as a married couple). If you go over that amount, a gift tax might kick in—but here’s the good news: you can use this tax-free limit to contribute to a 529 plan for someone’s education. Even better, you can “superfund” the 529 by putting up to five years’ worth of gifts in at once. That’s up to $90,000 (or $180,000 for couples) in a single year! (Keep in mind, that if you take this path, it counts as the annual gift for the next five years, so you won’t be able to contribute to the same individual for about 5 years.)

The money grows tax-free in the account, and as long as it’s used for qualified education expenses, it can be withdrawn tax-free too. It’s a smart way to help with college costs while keeping things tax-friendly for everyone involved.

4. State Tax Deductions

Many locations offer state income tax deductions or credits for contributions to a 529 plan. This means you could lower your state taxable income simply by contributing to a college savings plan. Many employers offer a payroll deduction, so you can contribute to your savings directly from your paycheck, similar to health benefits and retirement plans. The specifics vary by state and employer, but you can find your specific state income tax deduction limits here.

Every bit helps when it comes to saving for higher education.

Eligibility and Contribution Limits

529 plans are widely accessible, with a few basic requirements for opening an account. To open a 529 plan, you must be a U.S. citizen or resident who’s at least 18 years old, so these plans are typically set up by a parent or grandparent looking to support a child’s future education. The beneficiary—the student who will eventually use the funds—must also be a U.S. citizen or resident and have a Social Security number or tax identification number. This flexibility allows families to start saving early, giving their future college grad a strong start on educational expenses.

Contribution limits vary by state and are generally quite high – ranging from $235,000 in Georgia and Mississippi to $575,000 in Arizona, allowing you to save up to the cost of attending an accredited institution. Additionally, contributions up to $18,000 per year per donor (in 2024) are eligible for the annual gift tax exclusion, meaning that it doesn’t contribute to the donors lifetime gifting limit, and the receiver doesn’t need to pay taxes on the gift.

Tips for Choosing the Right 529 Plan

Choosing the right 529 plan for you and your family involves a few  considerations, and assessing your own personal pros and cons:

Investment Options

Each state’s plan offers different investment portfolios, from slower growth, more conservative investments to more aggressive options. Consider your time horizon and the investment options when choosing the best plan for you. It’s all about finding a plan that works best for your family’s goals. Some examples of types of portfolios that you can invest in with a 529 plan include:

  • Age-Based Portfolios: These portfolios automatically adjust over time. Think of age-based portfolios as a ‘set it and forget it’ option—they get more conservative as your child nears college age.
  • Static Portfolios: With static portfolios, you pick an investment mix and it stays that way – until you change it.
  • Individual Fund Options: Want more control? With individual fund options, you can customize your own mix by selecting from different funds, like U.S. stocks, international stocks, bonds, and money markets.
  • Conservative Investments: If you’d prefer to keep things stable, some 529 plans offer FDIC-insured options or low-risk bond funds. These are designed to protect your principal, even if they won’t grow as fast as riskier choices.

Account Fees

Additionally, depending on how your state’s 529 plan is administered, there may be management fees. These fees are relatively small compared to the investment (often between 0 and 1% of the account balance).

State Specific Tax Benefits

At this point, it is also worth noting that you aren’t required to invest in your state’s 529 plan. You’re able to invest with any state, however, depending on your state’s tax guidelines, you may not be able to take advantage of your state’s income tax benefits if you invest with an out-of-state plan. Compare the tax benefits of choosing an in-state 529 plan to any investment options or fees.

How to Make the Most of a 529 Plan

To make the most of your 529 plan, it’s best to start early. Small, but regular, contributions add up over time due to compound interest. Consider setting up automatic monthly contributions to help reach your savings goals.

  • Start Early: The earlier you start saving, the more time your investments have to grow tax-free. Even small contributions can grow significantly over time thanks to compound interest.
  • Contribute Regularly: Set up a monthly contribution plan to build your savings consistently. Some plans even allow payroll deductions to make contributing even more seamless.
  • Use the Funds Wisely: Withdrawals should only cover qualified education expenses in order to avoid penalties. For non-qualified withdrawals, you will owe income taxes and a 10% penalty on earnings associated with that withdrawal.

Maximize the Tax Benefits

To optimize 529 tax benefits, keep the following in mind:

  • State Tax Deductions: If your state offers a tax deduction for contributions, maximize this benefit by contributing enough each year to claim the full deduction.
  • Avoid Non-Qualified Withdrawals: Withdrawals for non-qualified expenses are subject to income tax and a 10% penalty on the earnings, so it’s essential to use 529 funds only for eligible expenses.

529 plans are an excellent way to save for college, offering tax-free growth, tax-free withdrawals, and even state tax benefits that can help you reach your education savings goals. By taking advantage of these benefits, you’re not just saving—you’re making a real investment in your child’s future.

With the right plan in place, you’re giving your future college grad a fantastic start! Ready to explore more ways to plan for college expenses? Create a college savings plan today. The sooner you start, the more prepared you’ll be to invest in the future!

Want to learn more? Consider chatting with a financial planner* today to get all your questions answered.


Disclosures

*Please be aware that securities, insurance products, and investment advisory services offered by Citizens Securities, Inc. and Clarfeld Financial Advisors, LLC (both affiliates of Citizens Bank, N.A.) are different from those offered by the bank and are subject to investment risk, including possible loss of principal.

SECURITIES, INVESTMENTS AND INSURANCE PRODUCTS ARE SUBJECT TO RISK, INCLUDING PRINCIPAL AMOUNT INVESTED, AND ARE: · NOT FDIC INSURED · NOT BANK GUARANTEED · NOT A DEPOSIT · NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY · MAY LOSE VALUE Citizens Wealth Management (in certain instances DBA Citizens Private Wealth) is a division of Citizens Bank, N.A. (“Citizens”). Securities, insurance, brokerage services, and investment advisory services offered by Citizens Securities, Inc. (“CSI”), a registered broker-dealer and SEC registered investment adviser – Member FINRA / SIPC. Investment advisory services may also be offered by Clarfeld Financial Advisors, LLC (“CFA”), an SEC registered investment adviser, or by unaffiliated members of FINRA and SIPC providing brokerage and custody services to CFA clients (see Form ADV for details). Insurance products may also be offered by Estate Preservation Services, LLC (“EPS”) or an unaffiliated party. CSI, CFA and EPS are affiliates of Citizens. Banking products and trust services offered by Citizens.

Citizens Securities, Inc. and Clarfeld Financial Advisors, LLC do not provide legal or tax advice. The information contained herein is for informational purposes only as a service to the public and is not legal advice or a substitute for legal counsel. You should do your own research and/or contact your own legal or tax advisor for assistance with questions you may have on the information contained herein.

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