Parents want the best for their children. Saving for their future is a smart start, but what’s the best way to save? If college is one of the goals for your child, 529 college savings plans offer a wealth of benefits. Check them out and see for yourself.
1. Tax-free distributions1
Distributions from a 529 account are tax free if used for qualified education expenses, including tuition and fees, room and board, books, electronic equipment (such as a laptop or tablet and internet access), and other necessary supplies. Plus, it’s not just for traditional colleges and universities: 529 plan benefits apply to vocational or trade schools, such as agricultural or technical institutions. What’s more, they can be used to pay up to $10,000 per year in tuition for children in kindergarten through grade 12. 2
2. Financial flexibility
You and your financial professional can decide how the account will be invested; most plans offer a wide range of investment options, including target-date and risk-based portfolios.
3. Considerable limits
529 accounts do have maximum aggregate limits, but they're generous, ranging from $235,000 to $529,000 per child, determined by state. You don't have to open a 529 account in the state you live in, but some states offer tax benefits to those who do.
4. Others can contribute
Grandparents, as well as other family members and friends, can contribute to your child’s account. The IRS allows individuals to make an annual gift of $15,000 per recipient ($30,000 for couples filing jointly) without triggering taxes. For 529 plans, it allows individuals to gift $75,000 ($150,000 for couples) in a single year if those gifts are averaged out over five years of tax filings.3
5. Parental control
Parents (or grandparents) remain in control of the account of the designated beneficiary, so you can ensure that the distributions are being used for qualified educational expenses.
6. Create a legacy
If your child decides that college isn't the right fit—or if there's money left over once he or she graduates—you can switch beneficiaries of the account to another child or even a grandchild. 529 accounts don't expire, so you can stretch the benefits on to future generations.
Another key consideration: A 529 account’s impact on financial aid isn’t as severe as you might think. Only 5.64% of the account’s value is factored in to your child’s Expected Family Contribution, which is the formula used to determine financial aid eligibility.
Expected family contribution
Your financial professional can help you determine the best course of action for your family.
1 State tax laws and treatment may vary. Earnings on nonqualified distributions will be subject to income tax and a 10% federal penalty tax. Please consult your tax advisor for more information. 2 Please check to determine if your state offers a similar state tax benefit for K through 12 education. 3 For 2019. State laws and treatment may vary. Earnings on nonqualified distributions will be subjected to a 10% federal penalty tax. Please speak with your tax advisor for more information.