CollegeWell

5 Main Benefits of a 529 Plan

By Jonathan Sparling

  • March 11, 2022
  • 3 min read

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For families saving for college, 529 plans are a great option. They are available to everyone, easy to open, and offer excellent benefits. Check out these 5 main benefits of a 529 plan, then ask yourself, “Why not open one?”

 

1. Tax-advantaged savings

Perhaps the most attractive benefit of 529 plans is the tax advantages.

  • Contributions grow tax-deferred, meaning you pay no annual taxes on investment returns each year.
  • Withdrawals are tax-free, assuming you use funds on qualified education expenses.*
  • Even though 529 contributions are made with after-tax dollars, some states offer an income tax deduction or credit on contributions within the tax year.

Are you seeing triple tax advantages here? It’s a real possibility!

 

2. Account flexibility

With 529s, there are no income phaseouts — meaning no matter what you make, or if that changes, you can open an account and keep it open.

Since you control the funds in your 529, you can change the beneficiary to another eligible family member anytime. This flexibility is especially important if the child you opened the account for doesn’t go to college.

Read more about 529 plan flexibility >>

 

3. Minimal impact on financial aid

A 529 account owned by the parent of a dependent student is reported as a parent asset on the FAFSA and CSS Profile. Since parent assets are factored into financial aid formulas at lower rates than student assets (no more than 5.6% for the FAFSA and 5% on the CSS Profile), the overall impact on financial aid eligibility is small.

A rule of thumb: When reporting 529 funds on financial aid applications, report the total value of your 529s for all children, not just the student applying to college.

 

4. Money for college and more

Recent changes to legislation have expanded the use of 529 savings plans. You can now use the money on:

  • K-12 education expenses — up to $10,000 per student
  • Student loan repayment — lifetime limit of $10,000
  • Approved apprenticeship programs

 

5. Generous gifting limits

529 plan contributions are considered completed gifts and qualify for annual gift tax exemptions. You can contribute up to $16,000 per beneficiary per year without incurring a gift tax penalty (or $32,000 for joint filers).

What’s unique about 529 plans is the freedom to contribute the equivalent of five times the annual gift exclusion amount in a lump sum, currently $80,000 for single filers and $160,000 for joint filers.

*Earnings in 529 plans are not subject to federal tax and, in most cases, not subject to state tax if withdrawals are used for eligible college expenses, such as tuition and room and board. However, if you withdraw money from a 529 plan and do not use it for an eligible college expense, it will generally be subject to a 10% federal tax penalty on earnings in the account.

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