Pros and Cons of 529 Plans
| Advantages | Disadvantages |
| Federal income tax benefits, and sometim ... | Must use funds for education |
| Low maintenance | Limitations on state tax benefits |
| High contribution limits | No self-directed investments |
| Flexibility | Fees |
- Tax benefits. ...
- Low maintenance. ...
- High contribution limits. ...
- Favorable financial aid treatment. ...
- Flexibility. ...
- Penalty for non-qualified withdrawals. ...
- State income tax recapture. ...
- Limited investment choices.
What are the benefits of having a 529 plan?
You can transfer wealth with a 529 plan
- Use the College Planning Calculator to estimate your student's education costs and find out how much to invest each month to pursue your goal
- Learn about investing in a 529 plan
- Get strategies to help you save and invest for a child's education
How much can you contribute to a 529 plan?
- Contributions in excess of $3,380 may be carried-forward to be applied in subsequent tax years.
- This number is subject to an inflation adjustment and rounding each year. ...
- Incoming rollovers from other states' 529 plans are accepted. ...
- The 365-Day Rule effects the tax treatment on contributions when a withdrawal is made within a 365-day period. ...
What should we do with the 529 plan?
- You cannot make the five-year election with less than $16,000.
- The five-year election is all or nothing. No making a $50,000 contribution and calling $16,000 of it this year's contribution and making the five-year election for the rest of the ...
- There are no joint elections. ...
- Don't forget other gifts. ...
What expenses can be paid from a 529 plan?
You Can’t Use 529 Money for These 6 College Expenses
- College applications and testing. Before you go to college you have to apply, and this often involves taking standardized tests such as the SAT and ACT.
- Insurance. Health insurance, car insurance, renters insurance — these are necessary expenses for many students.
- Transportation. ...
- Sports and club activity fees. ...
- Dorm room furniture and decorations. ...
What is the downside to a 529 account?
The rules on 529 plans are strict. The most important one is this: you must use funds in a 529 account to pay for qualified educational expenses. Otherwise, you'll owe taxes on the investment gains at whatever the IRS would normally charge you plus an additional penalty rate of 10 percent.
Why 529 is not a good idea?
It could hurt your child's chances of getting financial aid Any distributions from a 529 plan that's owned by a third-party are counted as untaxed income, and they may hurt your child's chances of qualifying for financial aid, including grants, work-study programs, and subsidized loans.
Is it worth setting up a 529 plan?
A 529 plan is beneficial for parents who place importance on a college education and want to save money when making financial contributions. The advantages are too good to ignore — contributions grow tax free, and as long as you use the withdrawals for qualified education expenses, they're also non-taxable.
What happens to my 529 if my child doesn't go to college?
If your child doesn't use all of their 529 funds, you'll be able to use up to $10,000 to pay off their student loans. If one child doesn't go to college at all, you can use their funds to pay up to $10,000 in student loans for each of their siblings.
What does Dave Ramsey say about 529 plans?
Dave warns against using a 529 Plan that would freeze your options or automatically change your investments based on the age of your child. Stay away from so-called “fixed” or “life phase” plans. You want to stay in control of the mutual funds at all times.
What is the average return on 529 plan?
In 2011, people thought a rate of return around 3% for a 529 plan was amazing. Since 2011, the S&P's compounded annual growth rate (CAGR) is ~12% from June 2011 to June 2020. That is a lot more tax-free growth than the 3% account owners got back in 2011.
Which is the best investment plan for child?
Best Child Investment PlansPlan NameEntry AgeHDFC SL Youngstar Super Premium Child PlanLife option- 18/65 years Life & Health Option-18/55 yearsICICI Pru Smart Kid's Regular Premium20/54 yearsKotak Head start Child Assure Plan18/60 yearsLIC – New Children's Money Back Plan0/12 years16 more rows
How much should parents have saved for college?
For a child born this year, parents should save at least $250 per month for an in-state public four-year college, $450 per month for an out-of-state public four-year college and $550 per month for a private non-profit four-year college, from birth to college enrollment.
What are the benefits of a 529 plan?
This will allow you to find the one that offers the options best suited to your needs. 529 plans offer several benefits, including: Federal tax breaks.
What is a 529 plan?
529 plans are education investment accounts with special rules and tax benefits that help families save for college—and even for K-12 tuition. These plans come in multiple forms: a prepaid tuition plan or a savings plan that allows after-tax contributions toward investments in mutual funds and exchange traded funds.
What are qualified higher education expenses?
Qualified higher education expenses include tuition and fees, room and board (as long as you are enrolled at least half-time), books and computers or computer equipment for the student’s use. State tax breaks. States may offer tax benefits such as tax credits or a tax deduction for contributions to 529 plans.
How much can you make with a K-12 tax free withdrawal?
Now, they also can be used for some K-12 costs in certain states. You can now make up to $10,000 in tax-free withdrawals annually to pay for expenses at public, private or religious elementary and secondary schools.
How many states offer guaranteed tuition?
About a dozen states offer guaranteed tuition plans that allow you to save for future tuition at today’s prices. This allows you to sidestep tuition price hikes and inflation. You can compare plans by state to see if your home state offers a prepaid tuition plan.
Is it safe to invest in a 529 plan?
As with any investment, there are risks to using a 529 plan to save for college. There are pitfalls you should look out for when investing in a college savings plan, including: Tax penalties for certain withdrawals.
Do you have to be an investment expert to invest in a 529 plan?
Age-based options. You don’t have to be an investing expert to develop a successful 529 plan savings strategy. You can choose a package of investments based on the age of the student and how risk averse your family is.
What is the benefit of a 529 plan?
The biggest benefit of the 529 plan lies in raising money without taxes tax-deferred growth and tax-free withdrawals it can provide. 529 plans can be invested in a wide range of investment options. You can invest money in mutual funds and the stock market, it all depends on you.
Why is a 529 account good?
So, here are the top reasons a 529 college savings account is increasingly worthwhile. 1. The most known benefits of 529 plan – a tax break. The decision of using 529 college savings plan to fund college education costs will provide you with a variety of state and federal tax benefits.
Why is it important to set up a 529 plan for your child?
So it is important to set up a 529 plan for your child or beneficiary as early as possible to take full advantage of the growth and tax opportunities.
How many 529 plans can I have?
There is no limit on the number of 529 plans you can hold at one time. That means even if you’ve already picked a plan in your state, it’s not too late to find a plan that suits you better. 5. Use a 529 plan to fund your own continuing education.
What happens if you don't use your 529?
If you don’t use money from 529 plan for qualified higher education expenses, you will not lose it. But you will lose some of the preferential tax benefits. In this case, the earnings portion of your withdrawals will not be tax-free.
How much can you contribute to a 529 plan?
Contributions can be as much as $140,000 for couples or $70,000 for individuals — into one year by using the annual gift exemption.
Why is it important to compare 529 plans?
It is very important to have precise and proven facts because this decision will greatly affect you or on your children’s lives (or someone else you labeled as a beneficiary) 9.
1. Tax-free growth for education
A 529 plan gives you a tax-advantaged way to save for education. You can stash money on an after-tax basis and then grow it tax-free. When you withdraw the money for qualified educational expenses, you won’t pay any taxes on the gains, either.
2. Potentially high-return investment options
Depending on which plan you choose – each state has its own options – you can invest in stock funds and other market-based investments. That gives you the ability to earn outsize returns on your contributions and the potential to beat the galloping cost of college.
3. Potential tax breaks for contributions
If you invest through a 529 plan, you may even be able to get a tax deduction on your state income taxes. Not all states offer a tax break on your contributions, however, and you won’t get a tax benefit in a state where you don’t pay taxes. So, choose carefully.
4. Two 529 plan types
It often gets overlooked, but the 529 plan has a lesser-known option. The two types of 529 plans include:
5. The beneficiary can be changed
A 529 plan gives you a lot of flexibility about who can use the plan and when, says Van Sant.
7. 529 plans can be used to repay student loans
The 529 plan was expanded further in 2019 with the passage of the SECURE Act. Now a 529 plan can be used to pay off up to $10,000 in the beneficiary’s student loans as well as up to an additional $10,000 in student loans for each of the beneficiary’s siblings.
How to get started with a 529 plan
It can be easy to open a 529 plan, and you can start a 529 directly through a specific state’s plan or through a broker. You can start a plan with any state, but before you open one, you’ll need to do some research.
What are the benefits of a 529 plan?
529 plans provide important advantages to account owners and beneficiaries. Earnings aren’t subject to federal or state tax when used for qualified higher education expenses, such as: Tuition and mandatory fees. Computers, peripheral equipment, educational software, and internet access.
What is a 529 plan?
529 plans are designed to encourage saving for college. 529 plans are sponsored by states, state agencies, and educational institutions , and are authorized by Section 529 of the Internal Revenue Code. my529 is a 529 plan established and sponsored by the State of Utah.
What is a K-12 tuition expense?
K-12 tuition expenses at public, private, or religious schools. Payments on qualified education loans. This includes amounts paid—as principal or interest—on any qualified education loan of the beneficiary, or a sibling of the designated beneficiary.
Can you use 529 funds to pay off student loans?
However, the account owner cannot use 529 funds to repay a qualified loan and then use those same 529 funds to claim a tax deduction for student loan interest. Costs for registered apprenticeships, including fees, books, supplies, and equipment required for participation.
What are the benefits of a 529 plan?
When saving for a child or grandchild's college education, 529 plans are popular for the tax advantages and flexibility they offer. Earnings grow tax-free and, as long as the money is used for qualified higher education expenses, withdrawals — including the earnings portion of a withdrawal — are federal, and often state and/or local, income tax-free. Qualified higher education expenses now also include: 1 Expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in a registered and certified apprenticeship program 2 Payment of student loans up to a lifetime maximum of $10,000 for a designated beneficiary or a sibling of the designated beneficiary#N#Footnote#N#1
Why are 529 plans so popular?
When saving for a child or grandchild's college education, 529 plans are popular for the tax advantages and flexibility they offer . Earnings grow tax-free and, as long as the money is used for qualified higher education expenses, withdrawals — including the earnings portion of a withdrawal — are federal, and often state and/or local, ...
What is a 529 withdrawal?
Footnote. 1 To be eligible for favorable tax treatment afforded to the earnings portion of a withdrawal from a section 529 account, such withdrawal must be used for "qualified higher education expenses," as defined in the Internal Revenue Code. The earnings portion of a withdraw that is not used for such expenses is subject to federal income tax ...
How much can you use for a 529?
You also can use up to $10,000 in 529 assets per calendar year per beneficiary to help pay for tuition at an elementary or secondary school.
Can you invest in a 529 plan?
NOTE: Certain states may offer tax or other benefits for investing in their Section 529 plan . Some states may reduce or eliminate those benefits for investments in Section 529 plans administered by a state other than your home state or your beneficiary's home state.
Is a 529 plan deductible?
While contributions to 529 plans aren't deductible on your federal tax return, your investments have the opportunity to grow tax-deferred, and distributions that go to the beneficiary's qualified education costs are free from federal taxes. Footnote. 1.
Is a 529 plan a state tax deduction?
Investing in a 529 plan sponsored by your home state can bring you additional tax advantages. Nearly every state sponsors its own 529 plan to pay costs at accredited schools in any state. Many offer state income tax deductions to residents contributing to their home state's plan.
What is a 529 plan?
A 529 plan account owner must select from a menu of investment options offered by the 529 plan. This typically includes static investment portfolios that aim to achieve a targeted level of risk, individual fund portfolios and age-based portfolios that automatically shift asset allocation as the beneficiary gets closer to college.
What is the maximum amount you can contribute to a 529 plan?
Maximum aggregate limits vary by state, ranging from $235,000 to $529,000.
How much can I contribute to the IRS in 2021?
In 2021, up to $15,000 qualifies for the annual gift tax exclusion. There is also an election to contribute as much as $75,000 in one year without generating a taxable gift if the contribution is treated as if it were spread over five years.
When will 529 be available for 2021?
April 14, 2021. Paying for college is a major expense. If you’re thinking about opening a 529 plan for a child or grandchild, it’s important to understand 529 plan rules and how they work. This list of pros and cons of 529 plans will help you make the right choice for your child’s college savings.
Can a 529 plan be rolled over to another state?
State income tax recapture. If a 529 plan account owner does a rollover into another state’s 529 plan, any state income tax deductions and credits previously claimed may be subject to recapture, and the earnings portion of the outbound rollover may be added back to state taxable income.
Do 529 plans have to be taxable?
In most cases, states exclude qualified 529 plan distributions from taxable income, and many states offer a state income tax deduction or state income tax credit for 529 plan contributions. 529 plans are the only college savings plan to offer state tax benefits.
Is a 529 account considered a parent asset?
Favorable financial aid treatment. When a dependent student’s parent or a dependent student owns a 529 plan it is reported as a parental asset and has a relatively minimal effect on financial aid eligibility. Distributions from parent- and student-owned accounts are not counted as income on the Free Application for Federal Student Aid (FAFSA).
What is a 529 plan?
A 529 plan allows you to save for education. You add funds into the 529 account, and then you invest those funds to allow them to grow in the years prior to needing that money. When you go to withdraw that money for a qualified education expense, the growth of the account comes out tax-free.
1. Tax benefits
529 plans come with federal tax benefits, and some state tax benefits (depending on your state). The federal benefits come from the gains in a 529 plan not being taxed when they’re used for qualified educational expenses.
2. 529 plans are low maintenance
Investing in a 529 plan is actually quite simple. Most plans have age-based investment choices that will invest based on age of the child, or the time horizon until the money is going to be withdrawn, as well as risk tolerance.
3. You can automate your 529 savings
Most 529 plans will allow you to set up automated savings at a specified time, i.e. monthly or yearly, directly out of your bank account and into the 529. They will also allow you to set up automated investments. This means that any new contributions into the account will automatically be invested into the investment section you have chosen.
4. Gifting
One great thing about a 529 plan is that anybody can contribute to it, not just the owner. Most plans will offer a simplified way for other people to gift money to the account. Many plans will provide a link for you to send to people. This allows others to contribute directly into your child’s 529 plan.
5. Flexible Uses
Many people are reluctant to contribute to a 529 plan because they’ve been told that they can only use it to pay for traditional higher education tuition.
6. No Income Limits
Unlike many other education benefits that provide tax advantages, such as a Coverdell ESA, and certain education tax deductions and credits, 529 plans do not have income limits. Regardless of your income, you can take advantage of the federal tax benefits a 529 plan provides.
