Section 529 of the Internal Revenue Code was created in 1996 after parents and financial professionals lobbied legislators to provide a way for families to save for the rising costs of higher education. By 2000, 30 states had launched a 529 plan. All 50 states, plus the District of Columbia, offer them today.
Here’s a rundown of some of the key features of 529 plans.
1. Money can be withdrawn federally tax free.1 The Economic Growth and Tax Relief Reconciliation Act of 2001 exempted 529 plans from federal taxes if used for qualified education expenses. Qualified education expenses include tuition, room and board, books and supplies, and fees. What’s more, a number of states also offer tax advantages for contributing to an account. Check with your state for additional benefits.
2. 529s aren’t just for college. In 2018, the Tax Cuts and Jobs Act expanded the definition of qualified higher education expenses to include tuition payments for private or religious school education from kindergarten through grade 12. Tuition payments are currently capped at $10,000 per school year.2
3. A wide range of higher education programs are eligible. In addition to traditional two- and four-year colleges, tuition and other expenses at apprenticeship programs, trade schools, and even international schools are considered qualified.
4. There are many investment options to choose from. 529 plans offer a diverse range of investment options, from individual mutual funds to age- and/or asset-based portfolios. You can change your investments twice a year and can also set up automatic contributions and/or payroll deductions.
5. Contribution limits are significant. The annual gift tax exclusion for single tax filers is $15,000; for married couples filing jointly, it’s $30,000. Single filers and married couples can accelerate their giving to $75,000 and $150,000, respectively, by taking advantage of the five-year gift tax averaging. Most plans have aggregate limits that range between $235,000 and $529,000.
Despite their many benefits, only 30% of families have a 529 plan.3 The additional advantages of 529 education savings plans are many and include a wide variety of state plans to choose from, the ability to change beneficiaries without penalties, and minimal impact on financial aid eligibility.
As you map out a plan for your child’s education, be sure to meet with your financial professional. He or she can help you weigh the pros and cons of the options available, including 529 education savings plans.
1 State laws and treatment may vary. Earnings on nonqualified distributions will be subject to income tax and a 10% federal penalty. Please consult your tax professional for more information. 2 Please check to determine if your state offers a similar state tax benefit for K through 12 education. 3 College Savings Statistics, Education Data Initiative, October 2021.
This material does not constitute financial, tax, legal, or accounting advice, is for informational purposes only, and is not meant as investment advice. Please consult your tax or financial professional before making any decision.
John Hancock Investment Management Distributors LLC is the principal underwriter and wholesale distribution broker-dealer for the John Hancock mutual funds, member FINRA, SIPC.
John Hancock Retirement Plan Services, LLC offers administrative or recordkeeping services to sponsors and administrators of retirement plans. John Hancock Trust Company LLC provides trust and custodial services to such plans. Group annuity contracts and recordkeeping agreements are issued by John Hancock Life Insurance Company (U.S.A.), Boston, MA (not licensed in New York), and John Hancock Life Insurance Company of New York, Valhalla, New York. Product features and availability may differ by state. Securities are offered through John Hancock Distributors LLC, member FINRA, SIPC.