What you need to know about the “529” Education Savings Account

College savings accounts, known as the 529 Plan, can be confusing. Parents know that they have tax incentives. But what exactly are those benefits? Which investment options make the most sense? Which costs are covered and which are not? Many parents don’t care if they have so many questions. Here are answers to frequently asked questions about the 529 plan to help get rid of some of the fog.

There are two basic types of 529 plans. A more common type is the 529 College Savings Plan, which allows parents, grandparents, and others to invest money to cover eligible education for beneficiaries. A less common type is the 529 prepaid tuition program, where some state and private university consortiums currently attend school parents, grandparents, and other students at a set price. We provide it so that you can pay the fee in advance. Some states offer both types of plans.

What are the benefits?

Contributions to the 529 Plan are not tax deductible at the federal level. However, many states offer state income tax deductions or credits. Your money grows tax-free and withdrawals to pay tuition and other eligible expenses are free of federal taxes and, in most cases, state income taxes.

These plans can be used to pay for various college fees such as tuition, room, food, books, and computer equipment, and you can also pay up to $ 10,000 a year for K-12 tuition. There are many investment options and abundant plans. You can also transfer the money in your account to other recipients. There are many plans that are easy to invest even with a small amount, and there are also many low-priced direct sales plans (not sold via advisors).

Are there any downsides?

There are more positives than negatives, but one thing to consider is that you may face tax impacts and penalties for withdrawals that are not considered eligible costs. Another consideration: Your child’s college needs financial assistance may be reduced. (These issues are discussed in detail below.)

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Also, you can’t buy individual stocks within the 529 plan, you can choose from multiple investment options, but you have fewer options than if you were designing your own portfolio.

Where can I spend my money?

The 529 Plan money can be used to earn an undergraduate or graduate degree at most universities in the United States. 529 According to the College Savings Plans Network, a repository of plan information, funds may also be available for payments to certain qualified institutions outside the United States.

What investment options do you have?

there are many. People generally choose portfolio allocations that automatically become conservative as beneficiaries approach college age. Other options include 100% equity or fixed income funds, balanced funds that maintain a set of equities and fixed income, and stable value funds designed to prioritize principal protection. Some states offer FDIC insured banking options, such as relatively high-yielding savings accounts and certificates of deposit, to protect principal.

You don’t even stick to a particular investment. You can transfer some or all of the existing funds in your account to another investment option twice a calendar year or after changing beneficiaries. In addition, you can choose a different investment option whenever you join the plan. You can switch to another state’s plan once every 12 months, but some states exclude such shifts from their plans.

Is there a limit to the amount I can invest?

According to, each state has set a total contribution limit of $ 235,000 to $ 542,000 per beneficiary. Once your account reaches these limits, you will not be able to make any more donations, but your revenue will continue to accumulate. There is no annual donation limit, but it should be noted that donations are considered gifts for federal tax purposes. In 2021, we will be able to donate $ 15,000 per donor and per recipient, with no federal gift tax. You can also make a $ 75,000 tax-exempt 529 plan donation and evenly distribute it to your tax return for the next five years. This is an option that some grandparents use as a tool for real estate planning.

How do you find a plan?

You can compare state plans on the College Savings Plans Network site or at Always look at your state plan first to see if there are taxes and other benefits specific to state residents that make it a more attractive option. If you need professional advice on how to invest, there are also 529 plans sold by advisors, but these are often more expensive than direct sales plans.

Who can open 529?

Almost anyone can participate in the 529 plan. Parents, grandparents, other relatives, or family friends may own an account or donate to it. You can also set your education costs to 529. Trusts, legal entities, nonprofits, or government agencies can also open accounts in many states. The beneficiary must be a US citizen or resident alien with a Social Security number or federal tax identification number.

How can the 529 plan affect financial assistance?

Although there may be implications, experts say that the benefits of saving for college through the 529 plan are likely to outweigh the potential impact on financial assistance. Assets in an account owned by either a student or their parents are considered parental assets for federal financial assistance purposes, and typically only 5.64% of accounts are considered annually in the Fafsa (Federal Student Assistance Free Application) calculation. Will be done. According to, this is an advantage over being counted as a student asset. Distribution under this ownership structure does not disqualify the university for financial assistance. The assets of the grandparents’ account do not affect the student’s Fafsa, but the distribution counts as the student’s income and affects aid.

What if I don’t use all the funds in my plan?

Some parents are worried about what happens if their child doesn’t go to college or needs 529 money for something else. Account owners maintain control over their assets, regardless of the age of the beneficiaries. That is, the recipient can be changed at any time to another family member, such as a sibling, stepchild, adopted child, niece or nephew, aunt or uncle.

You can also withdraw some or all of the non-qualified education costs. However, you may pay a penalty. Withdrawn income (excluding donations) is subject to a 10% federal tax penalty in addition to state and federal income tax. In addition, there may be charges and penalties depending on the plan.


The country-backed investment plan known as the 529 Plan is the origin of its name. Article 529 Internal Revenue Service.They are officially Qualified tuition program..

Tax incentive: This means that if 529 funds grow without federal income tax (usually through holding a mutual fund) and are used for eligible education costs, they will not pay taxes on withdrawals.

There are two types of 529. Prepaid tuition plan (When purchasing future tuition at a fixed price) and Saving plan, Your money grows in the market.

Account holders can open accounts for any student or future student. BeneficiaryParents and grandparents often own a beneficiary account or donate to an account set up by someone else.

529 is usually Education Savings Plan Not now University savings planThe 2017 tax reform has extended the obligation to include tuition fees for public, private and religious elementary or junior high schools.

Source: College Savings Plans Network, Investment Company Institute

Winokur Munk is a writer in West Orange, NJ. You can contact us at

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What you need to know about the “529” Education Savings Account

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