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A 529 plan is an investment plan in which contributions plus any earnings grow tax-deferred and remain tax-free if the funds are withdrawn to pay for certain qualifying education expenses. In addition to college tuition, 529 plan funds can now also be used for elementary and secondary school tuition.
However, 529 plans come with stipulations and options. Here’s what you need to know.
You can pay for these qualified education expenses:
You can’t pay for these non-qualified college expenses without being subject to taxes and a 10 percent withdrawal penalty on earnings:
Remember these four key benefits of a 529 plan:
Ownership is flexible: There is no requirement to turn account ownership over to the beneficiary at a certain age. Generally a parent is named as the owner, but others such as a grandparent, aunt, or uncle can be named as owner. Be sure to understand financial aid considerations in ownership.
Accounts are transferable: Should the original beneficiary choose not to attend college (or doesn’t need the funds for another reason, such as a scholarship), the beneficiary can be changed to another relative of the original beneficiary without tax consequences.
Contributions are flexible: The amount you put in is flexible, and monthly contributions can be as low as $15 a month. Contribute up to $15,000 ($30,000 per married couple) annually per beneficiary in order to qualify for the annual gift tax exclusion. Anyone can make contributions to an established 529 plan account; friends and other family members can send in contributions to help build funds for education costs.
Provides for legacy planning: In addition to paying for education, 529 plans can be used for certain estate and tax planning strategies. Talk to a financial professional and tax professional for more details.
Consider these details when choosing a plan.
Depending on your overall investment and portfolio strategy, you have options for structuring your 529 plan’s investments inside the 529 plan account.
When should I enroll? You can start investing as early or as late as you want. However, starting early and making regular contributions may benefit your overall strategy.
However, the income considerations on the FAFSA application depend on who is named as the owner of the 529 account:
Learn how we can help you plan for your children’s education.