There are many benefits provided through a 529 plan making it a go-to option for college savings. Here are some key reasons why so many families choose the 529 as a savings vehicle for college.
529 Funds Grow Tax Deferred
Money will grow in a 529 plan by way of interest, dividends, and capital gains on the investments in the portfolio. The good news is that tax-deferred status means the savings grow without taxes reducing the amount saved each year. This is a big difference from a standard brokerage account or investment that is taxed each year -- reducing total gains as a result.
Tax-Free Distributions for Higher Education Expenses
Once it's time to pay for college, 529 plan withdrawals can be used to pay for qualified expenses on a tax-free basis. Making tax-free withdrawals is also a tremendous benefit. The investment has been growing tax-free and is now used tax-free. Qualified expenses include tuition, room, board, books, and other expenses that the college, university, or other eligible institution of higher education deems to be necessary to attend their institution. If the account was subject to taxes, a portion of the savings would be used to pay the taxes, not actual college expenses.
Account Owner Has Flexibility
The owner of a 529 plan can change the account beneficiary to other members of the family (or themselves) without penalty. This is particularly helpful if money is left over once a student has finished college or if the student decides not to go to or finish college. The account owner can simply redesignate the beneficiary.
No Income Limits
529 savers have no income limitations, meaning there is no maximum income cutoff that would prevent a person from opening a 529 plan. 529's are designed to give all families access to a college savings vehicle with tax advantages.
529 Plans Avoid the "Gift Tax"
You can contribute up to $16,000 annually to a beneficiary's 529 plan while avoiding any federal gift tax on the proceeds. Another option, especially important for estate planning, is to deposit up to $80,000 into a beneficiary's 529 account in one year. $80,000 is the sum of 5 years of contributions rolled into one year. This exception requires that no other contributions be made by that donor during the next five-year period to avoid the gift tax. Spouses may also contribute a like amount which increases the gift tax free contribution to $32,000 or $160,000 per beneficiary if the five-year accelerated gifting provision is used.
No Age Restrictions
There are no minimum or maximum age requirements for participants in the program, or for when contributions or distributions must be made. This allows grandparents to help with college savings for grandchildren.
High Maximum Contribution Limits
College may be expensive, but 529 plans can keep families covered. Each state has a specific total contribution limit as high as $300,000 to $550,000. That's enough to cover undergraduate programs and even graduate-level programs for many students.
Protection of Savings From Bankruptcy and Creditors
If the account owner files for bankruptcy, all, or part of the 529 account may be excluded from the bankruptcy estate by federal law or may be exempt by special state bankruptcy exemptions. Certain exceptions may apply, but generally, contributions made more than 2 years before a bankruptcy filing would not be accessible to creditors according to federal rules.
Professional Money Management and Service
Most 529 plans are offered by well-established mutual fund companies bringing professional money management to the portfolio. This keeps assets well organized and provides options to adjust the portfolio over time, like an age-based investment strategy that focuses on high growth during early years but shifts to a more conservative portfolio as the student nears college attendance.
529 Plan Savings Can Now Be Used for More Than College Saving
In recent years, Congress has expanded the use of 529 Plan savings to include tax-free withdrawals for:
- The payment of up to $10,000 of student loans per beneficiary
- Tuition and fees for secondary schools
All of these benefits have combined to make 529 Plans the college savings investments the first choice for many families planning to pay for future college expenses.