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What is a 529 Plan?

November 01, 2017

529 is the IRS section in the Internal Revenue Code. It is the “tag” name for a college savings plan created to help families save for their children’s college education over multiple years.

Each individual state may offer a 529 plan. The college you attend does not have to be in the state you have your 529 account. A state may also have multiple plans. Research is required to review the various plans.

Some advantages of a 529 plan are:

  • While contributions are not tax-deductible, earnings on the plan are federal tax-free
  • Withdrawals are tax-free when proceeds pay for college
  • States – 30 offer a full or partial tax-deduction or credit for 529 contribution

Not all state plans have low investment expenses. A review of plans is important. Some may be more economical with lump sum contributions while others may be better when depositing a stream of money throughout the year.

Usually the donor maintains control of the account. The beneficiary usually has no access or legal standing to the money (they are minors).

If a non-qualified withdrawal is made, income tax is charged on earnings as well as a 10% penalty.

Deposits to a 529 plan may be made by an individual up to $14,000 annually ($28,000 per couple). You may also contribute $70,000 at one time but space out the annual gift tax exclusion over five-years ($14,000 times 5 years = $70,000).

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