529 Plan Basics So what is a 529 plan? It is a tax-advantaged way to save for education expenses. The cost of a college education is a significant expense and, for some families, could end up costing more than a small home. A 529 plan resembles a Roth IRA. You put after-tax money into the 529 account and invest those funds based on time horizon and risk parameters for the future student. As the money grows, it does so tax free. Then, assuming you withdraw the money under the qualifying guidelines, the withdrawals will also be tax free.
Benefits of a 529 Plan 1.
Tax advantages a.
Under a special five-year gift rule, you may be eligible to make a special gift tax election and make larger 529 contributions (up to $75,000 for individuals or $150,000 for married couples) for each beneficiary in a single year without federal gift tax consequences. This makes 529 plans an effective way to reduce your estate taxes while also making a gift to a child or grandchild.
b. Some states also offer tax deductions for 529 contributions. 2.
Flexibility a.
3.
529 plans can be transferred to another family member with no age limit for the beneficiary.
Favorable financial aid treatment.
4. Withdrawals are tax free when you follow certain guidelines. 5. 26
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No income limitations on contributions. 5 2 9 p l an b a s i c s
