Key Takeaways:
- 529 College Savings Plans are tax-advantaged investment accounts that can be used for education-related expenses.
- All states have 529 Plans and you don’t have to live in the state in which you open an account. That gives savers a lot of options to find a plan that works for them.
- If a beneficiary of the 529 plan does not go to college, there are some options. The account can be used towards qualified trade school, apprenticeship programs, or can be named to a new beneficiary.
- Withdrawals for non-qualified expenses may also be subject to a 10% penalty.
What is a 529 Plan?
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A 529 plan, also known as a 529 savings plan or 529 college savings plan, is a specific type of tax-advantaged investment account that can be used towards college and education-related expenses
Every 529 plan account has an account owner and a beneficiary. Usually, parents or another relative or guardian open a 529 savings account for a child to be put towards future education expenses, including college tuition. Even non-relatives can open these accounts for others.
The individual that opens the account is the account holder and the named child is the designated beneficiary. The account holder controls the assets but anyone can contribute to an already established 529 account.
This type of investment account is specifically designed to save and help pay for education expenses. When money is withdrawn from the 529 plan and is used for qualifying education-related expenses, the individual doesn’t have to pay any taxes on the money. If the money is pulled out of the account and used for non-qualifying expenses, the individual will have to pay taxes and possibly a 10% penalty fee.
In the past, “qualifying education-related expenses” used to only mean college expenses. In 2017, it was amended to include some K-12 tuition costs up to $10,000. Withdrawing more than $10,000 incurs taxes and a 10% penalty.
Benefits of a 529 College Savings Plan
529 plans offer several compelling benefits that make them great saving tools for education.
- Tax-free growth for education. Unlike other savings accounts, any money that you invest in a 529 plan grows tax-free.
- No taxes for qualified expenses. Qualified expenses include college tuition and fees, room and board, vocational school, and K-12 tuition. Unqualified expenses incur an income tax.
- Potential state tax breaks. Some states offer tax benefits, such as tax deductions or tax credits, for contributions to 529 plans.
- Not restricted to your home state. Residents aren’t restricted to getting a 529 plan in their home state. You can research other states’ 529 plans to identify the best one for your needs and goals.
- Different investment opportunities available. Different 529 plans offer different investment opportunities, including stock funds, market-based investment options, low-risk-low-returns, high-risk-high-returns, age-based portfolios, and more.
- Investment flexibility. You can change your investment plan options up to twice per calendar year in order to maximize your earnings.
- Prepaid tuition options. Some states offer a prepaid tuition option where you save for future tuition at the current cost, protecting you and your child from inflation and tuition price hikes. Requirements and conditions can vary.
- Beneficiary can be changed. If your appointed beneficiary decides not to go to college, you can name someone else as the beneficiary. This could be another child of yours or anyone else that is a U.S. citizen with a Social Security number. You can even name yourself if you intend to go back to school.
- Flexibility of use. 529 plans can be put towards college-related expenses, K-12 tuition, and some qualifying trade schools, apprenticeship programs, and continuing education programs. It can also be used to pay off up to $10,000 of student loans for the beneficiary tax-free, and up to $10,000 for each of their siblings’ student loans tax-free.
- No income requirements. Once an account is open, you can save as much or as little as you’d like as there are no minimum or maximum annual contribution limits. All states have a lifetime contribution limit (excluding Wyoming, which doesn’t have a 529 plan).
- Low cost options. Most states require some investment when opening an account, but there are plenty of options for less than $1,000. Louisiana requires $0, for example.
- Easy to manage. A 529 plan can often be opened in just 10 minutes. You can opt to set it and forget it, or you can manage the account to maximize your earnings. You can also set it up to take money directly out of your paycheck.
4 Ways to Make a 529 College Savings Plan Work For You
529 college savings plans differ by state. Those interested in opening an account will need to explore their options to decide on the best plan and account for their needs, goals, and current financial situation. Parents are not restricted to opening a 529 plan in their home state.
1. Research and Compare
Once you decide to invest in a 529 plan, it’s important to research your options. Your home state is a good place to start, but don’t automatically assume that’s going to be the best one for your finances. When comparing your options, you should consider:
- Fees. Some states require annual account fees. While a majority of states charge nothing, some, including Arkansas and Colorado, charge between $15 and $30.
- Investment requirements. A majority of 529 plans will require at least some money invested into the plan when you open the account. Some states may require less initial investment from residents compared to non-residents.
- Investment options. Unlike other savings plans, you can’t self-invest with 529 accounts. States have different investment options available, some with several. You’ll want to compare these investment options to your short and long term financial goals.
- Annual contribution limits. While there are no annual limits to what you can contribute, there are gift tax limits to consider.
- Lifetime contribution limits. All states that offer a 529 plan have a contribution limit. These tend to range between $250,000 to $575,000.
You’ll also want to consider the other benefits and downsides offered by different state plans. Some offer tax breaks, for instance. Look into the fine print before opening a 529 plan.
2. Schedule Regular Monthly Contributions
Once you’ve decided for a plan and signed up, you may want to schedule regular monthly contributions. It’s not mandatory, but these could help you stay on top of your savings goals. Many even offer automatic investment plans that pull a designated amount from your paycheck every month.
For an in-state, four-year, public college, it’s recommended that you contribute at least $300 per month, but any amount you can save will help pay for education expenses and potentially reduce future borrowing.
Anyone can contribute to a 529 plan, too. You can ask relatives if they’d like to contribute once or more regularly.
3. Choose Your Investment Options Wisely
529 plans offer several investment options that you can choose from. Each has a different potential for returns and risk. You can choose from aggressive to moderate or conservative options or a mixed portfolio that spreads the risks and returns. You’re allowed to change your portfolio twice a year.
4. Use the Funds for Qualified Purposes
The tax breaks are the biggest benefits of a 529 plan, but you only enjoy those benefits if the funds are used for qualified purchases. The definition of “qualified purchases” depends on the state. However, they’ll all cover K-12 tuition up to $10,000 per year and college-related expenses, as well as expenses for vocational and trade schools.
College-related expenses include:
- Tuition and fees
- Books, supplies, and equipment directly related to college
- Housing and food if the student is enrolled at least half-time
- Student loan repayment up to $10,000
Expenses that do NOT count as “college related expenses” include:
- Health insurance
- Transportation
- College applications.
If the 529 plan funds are withdrawn and not put towards qualifying expenses, the money must be claimed as income. It will be subject to income taxes and possibly a 10% penalty.
The cost of college can be overwhelming, but opening a 529 plan for someone could be a great way to help offset the expense and save for the future. If you’re thinking about opening an account, be sure to compare your options and keep your financial goals in mind to find the best 529 plan for you. Also consider talking to a financial advisor* if you have more questions.
Sometimes, even with savings, you won’t have enough to cover the cost of attending college. Student loans could help bridge the gap. Use our Student Loan Finder to start exploring your options today.
Disclosures:
*Securities, Insurance Products and Investment Advisory Services offered through Citizens Wealth Management.
Citizens Wealth Management does 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.
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.
Securities, Insurance Products and Investment Advisory Services are: NOT FDIC INSURED, NOT BANK GUARANTEED, MAY LOSE VALUE, NOT A DEPOSIT, NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY.
| Lender | Rates (APR) | Eligibility | |
|---|---|---|---|
 |
5.34%-15.96%* Variable
3.99%-15.61%* Fixed
|
Undergraduate and Graduate
|
VISIT CITIZENS |
 |
4.92% - 15.08% Variable
3.99% - 15.49% Fixed
|
Undergraduate and Graduate
|
VISIT SALLIE MAE |
 |
4.50% - 17.99% Variable
3.49% - 17.99% Fixed
|
Undergraduate and Graduate
|
VISIT CREDIBLE |
 |
6.00% - 13.75% Variable
3.99% - 13.75% Fixed
|
Undergraduate and Graduate
|
VISIT LENDKEY |
 |
5.50% - 14.56% Variable
3.69% - 14.41% Fixed
|
Undergraduate and Graduate
|
VISIT ASCENT |
 |
3.70% - 8.75% Fixed
|
Undergraduate and Graduate
|
VISIT ISL |
 |
4.99% - 16.85% Variable
3.47% - 16.49% Fixed
|
Undergraduate and Graduate
|
VISIT EARNEST |
 |
5.00% - 14.22% Variable
3.69% - 14.22% Fixed
|
Undergraduate and Graduate
|
VISIT ELFI |
