What is a 529 plan?
Named for Section 529 of the U.S. tax code, a 529 plan is a tax-advantaged investment plan operated by a state to encourage saving for education expenses. All 529 accounts enjoy the same federal tax treatment, and depending on where you live, there may be additional state tax advantages. As there is risk when investing in a 529 account, we are required to advise readers talk to a financial advisor.
What are the qualifying education expenses?
Following the passage of 2017’s Tax Cut and Jobs Act, funds in a 529 plan may be used for tuition, books, fees, computer technology, or room and board at a qualifying college and for up to $10,000 in tuition at a K-12 public, private, or religious school.
What is the federal tax advantage for using a 529 plan?
The growth of your investment is not subject to federal taxation as long as funds are used for qualifying educational expenses. There is no federal deduction allowed for contributions.
What are the state tax advantages of investing in a 529 plan?
In addition to tax-free growth on any investment, taxpayers in some states may deduct contributions to a 529 plan from their state taxable income. See our chart of states that allow K-12 tuition in 529 plans.
Can I open a 529 account operated by a different state than my state of residence?
Yes, there is no requirement that you buy into the 529 plan of your state of residency; however, state tax deductions are usually only allowed when investing in the state-run plan.
Who may donate to a 529 account?
Anyone may contribute to a 529 plan for any beneficiary. This includes grandparents, other relatives, friends, etc. But it also means generous fellow parishioners, for instance, may contribute to your child's 529.
Can the beneficiary on an account be changed?
Yes, a beneficiary may be changed at any time, and changes in beneficiary among family members will not incur a tax liability. The IRS definition of family member is very generous and can be found here.
Is there an annual limit on contributions to a 529 plan?
The federal gift tax applies to donations larger than $15,000 per year. However, 529 accounts may be pre-funded with 5 years’ worth of gifts ($70,000 individually or $140,000 for a married couple filing jointly) without incurring the tax, so long as no further gifts are made for 5 years.
Is there an annual limit on K-12 tuition expenses?
Yes, the maximum amount that can be distributed tax-free per calendar year is $10,000 per student, regardless of the number of 529 accounts.
Can I use my existing 529 account for K-12 expenses?
There are no federal restrictions on using funds in a 529 account for K-12 tuition in 2018 and beyond. However, some states do not recognize K-12 tuition as a qualified expense in their laws, meaning a tax may be owed on growth at the state level. It is important to check with your plan manager regarding disbursements.