Section 529: College Savings Plans
A 529 plan is a state-sponsored education savings program that allows an
individual to save in a tax-deferred account to pay for a
beneficiary's post-secondary education at any accredited school in
the United States. Unlike Coverdell Education Savings Accounts,
which excludes joint filers with adjusted gross incomes (AGIs)
above $220,000 and single filers with AGIs above $110,000, there
are no income restrictions on those contributing to the plan.
529 plans come in two categories:
Prepaid Tuition Plans and College Savings Plans. Listed
below are some of the features of a College Savings Plan.
Taxation of Withdrawals
529 plan withdrawals are federal income tax-free as long as the
money is spent on tuition, room, board, books, or other qualified
expenses. Non-qualified withdrawals will require a 10%
penalty on investment gains and will be taxed as ordinary income
at the owner's rate.1
Unlike Coverdell Education Savings Accounts where annual
contributions are limited to $2,000 annually, contributions to 529
College Savings Plans are essentially unlimited. Many states,
however, do tend to limit contributions once plan assets have
reached a defined maximum (typically $200,000 - $250,000).
Further, individuals can give up to $11,000 annually (or
$55,000 under a special 5-year provision2) per
beneficiary without incurring the federal gift tax.
Flexibility and Control
Plan assets can be used to pay for qualified higher education
expenses at accredited colleges and universities nationwide that
are eligible to participate in certain federal student aid
programs. These include public and private colleges and
universities, graduate schools, two-year community colleges, and
The donor retains control over the account. Unlike
custodial accounts, under the Uniform Gifts to Minors Act, the
money in a Section 529 College Savings Plan does not automatically
become property of the child at age 18. The
donor also may change beneficiary as long as it is within the same
Many plans have low initial minimums of $500 or $1,000 and can
usually be arranged for automatic investments of as little as $50
or $100 a month.
You have many choices when
saving for a child or grandchild's college education. Be
sure to consider the newly enacted Section 529: College Savings
Plans when making your decision.
investor's home state may only offer favorable state income tax
treatment for investments made in a plan offered by such
state. Selecting a state plan where you are not a resident
may limit your ability to take advantage of any available state
income tax exemptions or state tax deductions for contributions
that your resident state offers. Certain state plans may
impose a penalty for "non-qualifying" withdrawals and if
you were able to deduct the original contributions on your state
income tax return, there may be a state "recapture" of
income tax due.
requires that no further gifts are made over the five-year period
and that the gift is treated as a series of five equal annual
gifts on the next federal gift tax return after the gift is made.
Failure to survive the five-year period may result in a portion of
the gift being included in the donor's estate for estate tax
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.