The Top Ten Reasons to Consider a 529 Savings Plan

 In Investment, Taxes

College tuition has increased dramatically over the years. According to the College Board Advocacy and Policy Center, the average annual cost (tuition, fees, and room and board) for a four-year, in-state public college is $18,391 for the 2013–2014 tuition year, and $40,917 per year for a four-year private college. Furthermore, tuition costs have been rising at about 5%, much faster than inflation rates.


What is a 529 plan?  

A 529 plan is a tax-advantaged college savings plan. The plan allows earnings to grow tax deferred. If withdrawals are used for qualified higher education expenses, they are free from federal income taxes and in many cases state income taxes. However, if distributions are not used for qualified education expenses they are considered non-qualified withdrawals and earnings are subject to taxes and a 10% penalty.


What are the benefits of using a 529 plan?

While there are several ways to save for college such as opening custodial accounts Uniform Gifts to

Minors Act/Uniform Transfers to Minors Act accounts, a Coverdell Education Savings Account (ESA) or setting aside money in a taxable account, maintaining a 529 account has some distinct advantages.


  1. Investment earnings are not taxed if account is used to pay qualified higher education expenses. Tuition, books, room and board at most accredited colleges and universities in the U.S. are considered qualified expenses for this purpose.


  1. Minimal financial impact on financial aid. The 529 account is considered an asset of the parent, not the child (beneficiary).  This will result in a lower weighting in financial aid formulas – a positive outcome for those seeking financial aid.  This is in contrast to UTMA/UGMA (custodial) accounts which are considered student assets for financial aid purposes. Furthermore, if the 529 plan is owned by a parent (but not a grandparent) earnings from a 529 college savings plan used to pay qualified education expenses will not be considered part of parental or child income that would otherwise reduce financial aid eligibility.


  1. The account owner maintains control over how and when the money is spent.  This insures the child does not spend the money on something other than college and allows the account owner to change the beneficiary to an eligible family member if the original beneficiary does not go to college. Also, if the funds intended for the original beneficiary are not used up, the account owner can transfer the remaining funds to another beneficiary who is an eligible family member.


  1. Some plans offer additional state advantages to their state residents like an upfront deduction for your contributions or income exemption on withdrawals.


  1. Unlike other types of college savings plans, 529 plans have no income or age restrictions and have no upper limit on annual contributions. However, once contributions to a 529 plan reach a predetermined amount (typically around $300,000) further contributions are not permitted.


  1. Contributions of up to $70,000 can be made for a given beneficiary in one year (or $140,000 combined for spouses) with no gift tax and no use of any portion of the lifetime gift tax exclusion under special five-year averaging rules. This is an exception to the rule that requires gifts to an individual above $14,000 a year to be reported to the IRS and counted toward the donor’s lifetime gift tax exclusion limits


  1. Account owners can choose from a selection of portfolios based on time horizon and risk tolerance.   The goal is to achieve a balance between risk and return.  Many plans offer aged-based strategies that reduce risk as the time to start college approaches. Account owners also have the option of creating their own portfolios from a mix of funds.


  1. Anyone can open a 529 including parents, grandparents, family relatives and friends.  


  1. Account owners are allowed to change investment options once per calendar year.


  1. 529 plan account balances are not includible in the taxable estate of the owner since any contributions are considered completed gifts for estate tax purposes.  



A 529 plan will provide the most benefit to those who start early with a consistent savings plan. The ten benefits outlined above offer a compelling case for making it part of an overall college savings plan.

Recent Posts