Named for Section 529 of the Internal Revenue Code, these are plans operated by a state or educational institution that help individuals and families save for college, graduate, or vocational school tuition and education-related expenses as well as K-12 tuition expenses for private, public, and religious schools in a tax-advantaged way.+ As of December 2019, savings can also be used for payment for fees, books, supplies, and equipment requires for apprenticeship on-the-job training and classroom instruction as well as to pay for a qualified education loan of up to $10,000 lifetime maximum for your beneficiary or their sibling. Contributions to the plan are made with after-tax dollars, but any earnings are tax-deferred while invested in the plan and tax-free if used to pay for qualified educational expenses.+ There are many differences between various programs, including participation requirements, investment options, state tax advantages, use of contributions, and other benefits offered.
Assets can be used toward qualified higher educational expenses at any eligible private or public college, university, graduate school, vocational school, or apprenticeship program anywhere in the country. In addition, college savings plans can now be used to pay for tuition expenses at K-12 public, private, and religious schools+ as well as for student loan repayment up to $10,000 lifetime maximum per beneficiary.
One of the benefits is when you save and use distributions toward qualified educational expenses, you don't have to pay tax on any earnings. That means you could have more tax-free money to use toward college and K-12 tuition expenses when compared with taxable investing.+
The plan can be used for tuition, fees, room and board, books, supplies, computer technology, and equipment required by a qualified institution of higher education as defined by the IRS as well as certain expenses for special needs students. You can also use the assets for tuition expenses up to $10,000 per beneficiary per year across all accounts at K-12 public, private, or religious schools.+ Savings can also be used for payment for fees, books, supplies, and equipment requires for apprenticeship on-the-job training and classroom instruction as well as to pay for a qualified education loan of up to $10,000 lifetime maximum for your beneficiary or their sibling. For more information, check IRS Publication 970.
Any U.S. resident, including the account holder, can be a beneficiary. The beneficiary must be an individual, not a trust or corporation. There are no income limitations, age restrictions, or state residency requirements. In fact, if you're thinking of going back to school, you can even open an account for yourself.
Only one person—referred to as the account holder—can open and control an account. If the account holder is a minor, a custodian must act on the minor's behalf. Each account may have only one account holder and only one beneficiary (future student), but you can open as many accounts for as many beneficiaries as you want.
You can request a distribution, as a nonqualified withdrawal, or change the beneficiary to an eligible family member.*
The new beneficiary must be a relative of the old beneficiary as defined by the IRS. A family member includes the beneficiary's spouse and the following other relatives of the beneficiary:
- Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them.
- Brother, sister, stepbrother, or stepsister.
- Father or mother or ancestor of either.
- Stepfather or stepmother.
- Niece or nephew.
- Aunt or uncle.
- Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
- The spouse of any individual listed above.
- First cousin.
*Earnings on nonqualified distributions are subject to income taxes and a 10% penalty. State tax treatment varies.
There are several options available if your beneficiary cannot use all of his or her account due to scholarship or lower-than-expected higher education costs to avoid paying an income tax penalty for non-education-related expense withdrawal:
- 529 plans can be used to pay any education-related expenses outside of the received scholarship, such as room and board, books, supplies, and equipment.
- You can transfer any unused funds to an eligible family member (see list above).
- You can allot unused account dollars toward postgraduate education.
Plans are available at the state and national levels. Review your state plan to determine if you qualify for any tax incentives. Be prepared to compare various features and review investment vehicles of different plans to find the one best suited for your beneficiary’s higher education needs.
Any investment earnings will depend on the market’s overall performance and the special investment portfolio you select. Each account will fluctuate with market conditions.
If you’re currently saving with an UGMA or UTMA account, you may use that money to fund your 529 plan. While any gains may be taxed at the time of the redemption of the UGMA or UTMA account, once the assets are in the 529 account, they will grow tax-deferred and can be distributed tax-free when used to pay eligible higher education expenses.
Yes, this would be handled as a rollover in which you must take a full distribution from the original plan and transfer assets within 60 days to the new 529 plan to avoid taxes or penalties. The beneficiary must remain the same or be a member of the original beneficiary’s family. The IRS only permits one 529 rollover per beneficiary in a rolling 12-month period.