529 Plans

529 Plans
529 Plans — A Less Taxing Way to Save for College


A Less Taxing Way to Save for College

Named after a section of the Internal Revenue Code, a 529 plan is a special savings plan designed to help you set aside money to help cover college tuition and expenses. These plans offer flexible contributions and the potential for tax-deferred investment growth and tax-free withdrawals for qualified educational expenses at any eligible college or university nationwide. Most states offer at least one 529 plan.

A 529 plan can be a very low maintenance way to save for college.

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Two ways to plan and save

There are two types of 529 plans:

  • Pre-paid tuition plans are generally sponsored by state governments and allow you to prepay tuition and sometimes room and board expenses at participating colleges and universities. You get the ability to lock in future tuition at today’s rates.
  • College savings plans work like a 401(k) or IRA by allowing you to make regular contributions on behalf of a beneficiary and invest the money. Investment options include mutual funds and age-based portfolios that automatically shift their investment mix as the beneficiary student gets closer to college age. The benefit has the potential to grow your money tax deferred, which can then be used to pay for qualified higher education expenses such as tuition, room and board, mandatory fees, books and computers. The risk is that your investment could lose value depending on market conditions.

Tax breaks

While contributions to 529 plans are not federally tax-deductible, investment earnings grow tax deferred while in the plan. If you use the money for qualified college expenses, you don’t have to pay any federal income tax on the withdrawals. It’s possible for your withdrawals to also be free of state income taxes if you invest in a 529 plan in your home state. Withdrawals from non-qualified educational expenses are subject to a 10 percent federal tax penalty and are taxed as ordinary income, unless an IRS exemption applies.

You’re in control

As the owner of the 529 account, you have control over the money. You—not your beneficiary child—decide when to take withdrawals and how to spend the money (but you’ll only get the tax breaks if you spend it on qualified college expenses). You can also change the beneficiary. Many plans even allow you to reclaim the money for yourself at any time. Of course, if the money is used for something other than a qualified educational expense, you’ll have to pay a 10 percent penalty plus regular income tax on the withdrawal, just as you would if you took an early withdrawal from a retirement plan.

Generally, there are no income or age restrictions for 529 savings plans. You can contribute a lot of money to these plans, both for yourself and for your beneficiaries. If adding money for a beneficiary, you will be subject to the IRS gifting limit, but contributions can be front loaded up to 5 years at a time.

529s and financial aid eligibility

Typically, the money accumulated in a 529 plan will count as parental assets when calculating financial aid eligibility.

Plan with us

Saving for college is just one of many decisions you need to make as part of a comprehensive financial plan. It needs to be balanced against saving for retirement, buying a home or paying off high interest-rate credit cards. But if you dream about your children attending college, a 529 plan may give you the flexibility you need to take some of the sting out of rising colleges costs. Work with us to help make the decision that’s best for you and your family.

You should consider the investment objectives, risks, and charges and expenses associated with municipal fund securities before investing. More information about municipal fund securities is available in the issuer's official statement. You may obtain a copy of the issuer's official statement by contacting a registered representative. Read the official statement carefully before investing.