Description
- Investment account that allows money to accumulate tax-deferred for a child’s college or graduate school education.
- Sponsored by a state and managed by various financial institutions.
Advantages
- Account assets are professionally managed.
- Investment choices within a plan can be modified or rolled over to a new 529 savings plan once every 12 months without tax penalty.
- Account owners can change the plan beneficiary (if the new beneficiary is a relative of the previous beneficiary).
- Withdrawals are federally tax-exempt if used for qualified higher education expenses, including tuition, room and board, fees, books, and equipment.
Tradeoffs
- No guaranteed rate of return.
- Distributions not used for qualified higher education expenses are subject to federal income tax plus a 10-percent penalty. Taxes and penalties apply only to earnings in the account.
Financial Aid Impact
- Low impact.
- Treated as an asset of the account owner. (Custodial versions of 529 plans are treated as parent assets of dependent students.)
- Qualified distributions are not considered income of parents or student.
The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that a college-funding goal will be met. In order to be federally tax-free, earnings must be used to pay for qualified higher education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10-percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.