A 529 plan is a type of tax-advantaged savings account for higher education costs. K-12 and apprenticeship programs were added in 2017, and expenditures for higher education would be covered starting in 2019. Following the implementation of the 2019 Setting Every Community Up for Retirement Act Enhancement. With the passage of the SECURE Act of 2019 and SECURE 2.0 in 2022, 529s may now be used for both the repayment of student loans and the establishment of a Roth IRA.
Key Points
A 529 plan is a tax-advantaged account. It lets you put money down for a child’s college education.
The majority of 529 plans don’t require investors to be residents in order to open an account, and nearly every state offers one.
Before choosing a plan, it’s advisable to compare your state’s plan with other available options because your home state may provide additional benefits to account owners who are residents.
What Is a 529 Plan?
A 529 plan is an investment account that offers tax advantages and used to cover some educational expenses. Anytime is a good time to start a 529 plan, and you can choose almost anyone as a beneficiary, including yourself. Upon reaching adulthood, the recipient may utilize the funds to cover the cost of their education. A 529 plan is open to everyone, even distant relatives or acquaintances.
529 plans, also referred to as qualified tuition plans, are frequently supported by states; Wyoming is the only one without one. While some states do make you a resident in order to use their 529 plans, the majority do not. It is advisable to check your options nationally before opening an account because you might be eligible for additional benefits under your state’s plan.
How Does a 529 Plan Work?
A 529 plan is like a retirement plan. Regular savings will be made, and the money will be invested in accordance with your risk tolerance or, if you opt for an age-based portfolio, the age of your child.
As long as you utilize the money you save in a 529 plan for qualified educational expenditures, it will grow tax-free and won’t be taxed when you remove it. College tuition, housing and board, books, computers, and software for students enrolled at least half-time, as well as up to $10,000 in tuition for private K–12 schools, are all eligible costs. You can choose to participate in any state’s plan, even though each state administers its own 529 plan. It is essential to consider the advantages of different accounts because you might be eligible for a tax credit or deduction for using your home state’s plan.
Prepaid Tuition vs. 529 Plans
There are two different types of 529 plans, each with unique advantages and dangers.
529 Plans for Savings
You can invest money through these programs in things like mutual funds or exchange-traded funds (ETFs). You won’t pay taxes on your income if you utilize the funds for eligible educational costs. Some states also provide additional tax advantages, such as the ability for savers to deduct 529 payments from their taxes. Because there are so many different state plans available, compare them to discover which ones will benefit you the most.
Plans for prepaid tuition
These kinds of plans enable you to buy tuition credits at affiliated universities at current rates; the plan beneficiary can then use those credits when they enroll in the institution. These plans are less widespread than 529 savings plans and have more limits.
Typically, prepaid plans can only be used for tuition, not for living expenses like room and board. The beneficiary must enroll at a participating institution in order to receive the full benefit of these programs, and they are also more likely to include state residency requirements.
Key Benefits of 529 Savings Plans
1. Receive federal tax benefits
If you utilize the money for eligible costs, any income / gains from your 529 assets are always tax-free at the federal level. If you utilize the funds for non-educational expenses, you may be required to pay income tax as well as a 10% withdrawal penalty.
Owners of accounts can contribute to a 529 plan to avoid paying gift taxes. If you give someone more than $17,000 for the tax year 2023, a gift tax is typically imposed. To a 529 plan, you can still make additional contributions while avoiding taxes.
According to the gift tax guidelines for 2023, account owners are permitted to make a single lump-sum contribution that is up to five times the annual gift tax cap, or $85,000 (or $170,000 for married couples). Bringing up your assets in this method could help you earn greater returns more quickly, but you will need to complete more paperwork at tax time to divide this sum over five years properly. When the five years are up, the process can be repeated.
2. Put the cash to use for expenses Other than College
You have a few options for using your 529 plan aside from typical college costs. It’s not required to be utilized for an undergraduate degree. Graduate and professional degrees, as well as trade schools and community colleges are also acceptable. You may spend up to $10,000 annually on K–12 tuition if your children attend a private school.
If funds remain in the account after the recipient graduates from college, you can still use them wisely. For student debt repayment on behalf of the beneficiary or the beneficiary’s sibling, a lifetime limit of $10,000 may be applied.
3. Make Simple Plan Modifications
The flexibility of 529 plans is one of their best features. Tens of thousands of dollars may have been saved, but it may be worrying if the recipient decides education isn’t for them. However, you can easily alter the beneficiary whenever you like. A spouse, step-sibling, in-law, cousin, or even a first cousin of the beneficiary’s spouse could be qualified as long as the new beneficiary is a family member of the original.
How to Choose a 529 Plan?
Consider what is offered in your home state first when deciding which 529 plan is ideal for your family. You might get a better rate by beginning your search at home because many plans provide unique benefits, such tax breaks for state residents.
Once you’ve taken notice of the specifics of your state’s plan, contrast it with what other states are providing. Pay close attention to the following elements when you study each 529 plan.
Tax deductions and other advantages
The earnings on your investments in any 529 plan are tax-free as long as you use the funds for eligible educational costs. However, if you invest in their plans, many states give you additional tax benefits, frequently in the form of state income tax deductions or credits. To receive benefits like these in that state, you must pay income tax.
When you make a contribution to a 529 plan in any state, few states, including Arizona and Pennsylvania, offer state tax incentives. You won’t discover tax benefits for contributing to a 529 plan in states without income taxes, like Florida and Texas.
States could also provide additional benefits for selecting their plan. In Colorado and Kansas, for instance, the state will match your contributions up to a predetermined amount. Other states, like Kentucky, won’t take your 529 plan into account when determining your child’s eligibility for financial assistance, which means you might be able to get extra money to help pay for college.
Fees
Account fees might reduce your income and erode any tax deductions you could receive. When comparing the fee schedules of various 529 plans, keep an eye out for these typical costs:
Account upkeep charges. When you first open your account, certain plans may charge an enrollment or yearly fee. If your account balance drops below a specific threshold, you can also encounter fees for out-of-state residents or low balances. You might be able to save money on many of these expenses by selecting a different plan since not all accounts impose this kind of fee.
Fees for investments. Typically, 529 plans invest in mutual funds or exchange-traded funds (ETFs), which have additional costs. Common in 529s, passively managed funds have lower costs than actively managed funds. Depending on the portfolio you select, these fees, which are normally assessed as a percentage of your investments, will change.
fees for management. Many state agencies use other companies to handle their 529 plans, and those companies charge customers their own fees, which are often calculated as a percentage of the investment.
The fees charged by each state’s 529 plan differ significantly, as do the investment options you select.
Investment Plan.
The 529 plan in each state provides at least a few different investing choices. Your investment strategy might be influenced by your risk tolerance, anticipated contributions, and the age of your child.
In some jurisdictions, for instance, age-based portfolios are available, which automatically modify your investment risks as your child approaches college age. Additionally, you can pick between actively managed and passively managed funds, which have various charges and risk aspects. Consider the maximum contributions for each plan if you intend to invest a substantial sum.
Direct versus advisor-sold
529 plans are either sold directly to consumers or through advisors. Direct-sold insurance is purchased directly from the state agency that oversees the 529 plan or from the company that administers the plan on the state’s behalf. Plans sold by advisers are bought from third parties like brokerage houses and investment advisors.
The reason why direct-sold plans are more popular is mostly due to the cheaper fees. For instance, according to 2019 Morningstar statistics, the average charge for a direct-sold, age-based portfolio was 0.35% as opposed to 0.87% for plans sold through advisors.
Plans that are sold by advisors frequently incur additional commission fees because they are sold by a third party. Plans marketed by advisors are also more likely to be actively managed, which results in greater fees.
Usability
Think about how simple it is to navigate the website and find out more about each 529 plan. Accessing account information online and doing simple operations on the internet, like configuring automatic donations or finishing a rollover, should be easy.
Also take into account how simple it would be for other people to contribute. Everyone is welcome to contribute contributions to your child’s education through 529 plans, which is one of its many advantages. Make sure the procedure is clear-cut and uncomplicated to execute if you have relatives or friends who are likely to contribute.
529 Plans vs States
The list below contains details on the direct-sold 529 savings programs offered by each state. The availability of prepaid tuition plans or extra advisor-sold programs is up to the individual states. For further details, see the website for the state’s 529 plan.
Nonresidents may qualify for in-state tuition at University of Alaska
Investment options:
Eight actively managed aged-based portfolios, six static portfolios or a University of Alaska (UA) portfolio, which can be used anywhere but offers special perks at UA
In-State Plan: Deduct up to $5,000 for single filers or up to $10,000 for married couples for contributions to the Arkansas planOut-of-State Plan: Deduct contributions up to $3,000 per Arkansas taxpayer (or $6,000 for married couples) to another state’s 529 planRoll-In: Claim a one-time deduction of $7,500 when you roll an out-of-state 529 plan into an Arkansas 529 plan
Other benefits:
N/A
Investment options:
Age-based and savings portfolios are available, or create your own custom portfolio
No deductions are available, but you don’t have to pay state tax on your account’s earnings
Other benefits:
The Matching Grant Program matches contributions to a new ScholarShare 529 account up to $200; plus you can get another $25 for setting up automatic contributions
Investment options:
Age-based, multi-fund and single fund portfolios are available, along with a guaranteed portfolio, which may be a good choice for investors with a short savings timeline
Iowa taxpayers can deduct up to $3,522 of their 2022 contributions per beneficiary (including rollovers); available deductions are adjusted annually for inflation
Other benefits:
N/A
Investment options:
Choose from four age-based savings tracks or 10 individual portfolios
Requires state residency:
No
Contribution limits
$25 minimum (or $15 if contributing via your paycheck), $420,000 maximum balance
No deductions are available, but you don’t have to pay state tax on your account’s earnings
Other benefits:
If the beneficiary moves to another state, they may still qualify for in-state tuition at Kentucky public collegesMoney in a Kentucky 529 plan will not be included when determining need-based financial aid.
Investment options:
Age-based and static portfolios are available, along with a Capital Preservation option
Louisiana taxpayers can deduct up to $2,400 in contributions per year, per beneficiary (up to $4,800 in deductions for married couples); unused portions may be carried forward to future years
Other benefits:
Depending on your income, the state will match up to 14% of contributions annually
Investment options:
Choose from 10 investment options, including age-based funds, mutual funds and a low-risk principal protection fund
No deductions are available, but you may not have to pay state tax on your account’s earnings
Other benefits:
You could be eligible for matching grants from the state, including:$100 when you open an account and deposit $25$100 when you make six automatic contributions from your paycheck or bank accountA 30% match on your annual contributions, up to a maximum of $300
Investment options:
You can manage your own investments in the state’s Direct Series, or work with a financial advisor if you invest in the Select Series. Both options offer age-based, diversified and single-fund portfolios.
Requires state residency:
No
Contribution limits
$25 minimum, $520,000 maximum balance
Asset-based fees
0%-0.51% for Direct Series; 0%-2% for Select Series
Maryland taxpayers can deduct up to $2,500 in contributions per year, per beneficiary (up to $4,800 in deductions for married couples); unused portions may be carried forward to future years
Other benefits:
Depending on your income, you could qualify for a $250 or $500 annual contribution from the state with the Save4College program
Investment options:
Invest in age-based portfolios or choose from one of nine fixed portfolios
Minnesota taxpayers can choose between a deduction or credit:Claim a deduction of up to $1,500 for single filers (up to $3,000 for married persons filing jointly); orClaim a credit equal to 50% of the annual contributions, for a maximum of either $250 or $500 (depending on your income)
Other benefits:
N/A
Investment options:
Age-based, multi-fund and single-fund portfolios, plus a guaranteed investment option
Requires state residency:
No
Contribution limits
$25 minimum (or $15, if contributing through your paycheck), $425,000 maximum balance
New Jersey taxpayers who earn $200,000 or less may qualify for a deduction of up to $10,000 per taxpayer, beginning with contributions made in 2022
Other benefits:
One-time matching contribution of the initial deposit into a new NJBEST account for a new beneficiary ($750 matching maximum) Students who attend a New Jersey college can receive a college scholarship of up to $3,000, depending on how long the plan has been openUp to $25,000 of your plan’s balance won’t be included when determining a beneficiary’s eligibility to receive state-based financial aid.
Investment options:
Age-based portfolios, four multi-fund options and two individual-fund portfolios
Requires state residency:
Yes, the account owner or beneficiary must be a state resident
North Dakota taxpayers can deduct up to $5,000 (or $10,000 for married couples) of your contributions
Other benefits:
Several matching programs are available through the state:North Dakota newborns can receive up to $200 in matching funds if you contribute to their 529 account within a yearKindergarteners in the state can receive a one-time match of up to $100 for contributions made between the ages of five and sevenDepending on your income, you might be eligible for up to $300 in one-time matching contributions. Account owners with an adjusted gross income below $80,000 (or $120,000 if married filing jointly) are eligible.Refer a friend to North Dakota’s 529 plan and you’ll both receive $25 after they open their account
Investment options:
Three age-based options and six individual investment portfolios
Requires state residency:
No
Contribution limits
$25 minimum, $269,00 maximum balance
Asset-based fees
0.48%; a $20 annual fee is waived for North Dakota residents
Ohio taxpayers can claim a $4,000 deduction per child, per year on their contributions; contributions over that amount can be carried over to future years, so you can claim additional deductions later
Other benefits:
N/A
Investment options:
Choose between preset age-based or risk-based portfolios or customize your own investment strategy
Oklahoma taxpayers can claim a deduction for contributions up to $10,000 per year for a single return and $20,000 per year for a joint return; contributions over that amount can be carried over for the next five tax years
Other benefits:
N/A
Investment options:
Age-based portfolios and static, risk-based options are available, along with a guaranteed investment option
Oregon taxpayers can earn a $150 tax credit for single filers or a $300 credit for joint filers. How much you have to contribute to earn the full credit depends on your income:
Other benefits:
Oregon newborns or kindergartners can receive $25 if you open an account for themIf account beneficiaries attend select Oregon universities, they can receive additional matching contributions worth thousands of dollars while attending schoolAdditional scholarships and sweepstakes are available through the 529 plan
Investment options:
Multiple age-based and static portfolios are available
Requires state residency:
No
Contribution limits
$25 minimum to open account ($5 minimum for other contributions), $400,000 maximum balance
Pennsylvania taxpayers can deduct up to $16,000 per beneficiary, per year; married couples can deduct up to $32,000 per beneficiary, per year, if each spouse has taxable income of at least $16,000
Other benefits:
Through the Keystone Scholars program, the state will contribute $100 for newborns born in the state
Investment options:
Age-based options and 14 individual portfolios are available, plus a separate guaranteed savings plan
Requires state residency:
No
Contribution limits
$511,758 maximum balance
Asset-based fees
0.21%-0.31%; $10 annual fee can be waived by opting into electronic correspondence
Under the Tennessee Investments Preparing Scholars (TIPS) program, low-income families can receive a four-to-one match on 529 contributions. For every $25 contribution, the state will add $100; there’s a $500 maximum match per year and a $1,500 lifetime max.
Investment options:
Age-based option made up of 10 age bands or choose from more than a dozen self-selected funds
Utah account owners can claim a tax credit up to certain limits. Individuals can claim a $105 credit on a maximum contribution of $2,130; joint tax filers can get a $210 credit on up to $4,260 in contributions
Other benefits:
N/A
Investment options:
12 age-based portfolios, 10 static options, and two customized options
Vermont taxpayers can claim a tax credit of 10% of the first $2,500 in contributions per beneficiary, per tax year; those who are married filing jointly can claim 10% of the first $5,000 in contributions each year
Other benefits:
N/A
Investment options:
Six investment portfolios, including age-based and multifund options
Requires state residency:
No
Contribution limits
$25 minimum (or $15 if contributing via your paycheck), $352,800 maximum contribution
Virginia taxpayers can deduct up to $4,000 in contributions, and deductions can be carried forward to future years if you contribute more than the maximumAccount owners who are 70 or older can deduct 100% of contributions.
Other benefits:
N/A
Investment options:
Choose from more than 20 portfolios, including age-based, risk-based and index options
For the 2022 tax year, Wisconsin taxpayers can deduct up to $3,560 per year, per beneficiary ($1,780 for married filing separate and divorced parents of a beneficiary). Larger contributions can be carried forward as a deduction in future years
Other benefits:
N/A
Investment options:
Age-based, multi-fund and single fund portfolios, along with a stable investment portfolio
Requires state residency:
No
Contribution limits
$25 minimum to open account, $527,000 maximum balance
