Ten big advantages of a 529 Plan account
A 529 Plan is a state-sponsored, tax-advantaged savings plan designed to encourage saving for future education expenses. These plans offer many key benefits making them one of the most popular education savings account types in the U.S.
1) 529 Plans are not just for college
In addition to covering most college expenses, 529 Plan funds can be used to pay for qualified trade school and K-12 tuition and expenses. Beginning in 2024, under certain conditions, excess 529 funds can even be rolled into a Roth IRA retirement account tax free. Learn more about how the Secure Act 2.0 provides new ways to use 529 Plans funds here.
2) No tax on earnings
One of the primary benefits of a 529 Plan account is that investment returns grow tax free.1 This means that as your contributions accumulate, they can compound over time without being subject to taxes, allowing more of your money to work for you.
3) No taxes on qualified withdrawals
Another significant advantage of 529 Plan accounts is that distributions used to pay qualified education expenses aren’t taxed.1 And the list of what qualifies is pretty extensive.
4) Contributions may be deductible
Most states that impose a state income tax offer a deduction for at least a portion of contributions made to 529 Plan accounts; however, they are not deductible for federal income tax purposes.2
5) Almost anyone can establish a 529 Plan account - not just parents
Grandparents, aunts, uncles or close friends can open a 529 Plan account for a loved one. Importantly, you can change the beneficiary at any time, even naming yourself.
6) Anyone can contribute to a 529 Plan account – not just the account owner
All 529 Plan accounts allow for third-party contributions. This means you can invite more people (grandparents, family, friends, distant relatives, coworkers, etc.) to contribute towards your loved one’s education, allowing for potentially faster accumulation of funds and greater opportunity for tax-free compounding.
7) Contributions are out of your estate
Contributions you make to a 529 Plan account are considered gifts and are, therefore, immediately removed from your estate. But, assets in 529 Plan accounts don’t pass to beneficiaries. As the account owner, you maintain control of the money and decide how funds get used. Importantly, you can change beneficiaries at any time, even naming yourself.
8) Waiver of annual gift tax exclusion
Typically, gifts to other people are limited to a specific amount set by the IRS per tax year. Anything over that amount is taxable, and the donor pays the tax; however, 529 Plan accounts get a special pass. You can superfund the account by front loading five years of contributions into a single gift and avoid paying the annual gifting tax.3 This strategy allows a larger pool of money to be invested up front, creating an opportunity for the entire investment to earn a greater return over time.
9) No income limits
Tax-deferred retirement accounts, like Traditional and Roth IRAs, have limitations on how much (if anything) you can contribute based on your income. Contributions to 529 Plan accounts have no income-based limits. You can contribute up to account limits regardless of how much money you make.
10) Unmatched flexibility on withdrawals
You can withdraw money from a 529 Plan account any time for any reason. Still, these withdrawals should be used to pay for qualified education expenses. Distributions for anything else creates a taxable event and may trigger additional penalties.
Non-qualified withdrawals are taxed at your effective federal (and state, if any) tax rate. In addition, there is a 10% federal penalty. The state may also impose penalties. Any state income tax deduction or credit you took on contributions could also be subject to recapture.
The tax and penalty will be liable to the person who reports the income. That could be you or the account’s beneficiary.
529 Plans offer unparalleled access to your contributions. You can withdraw funds anytime, for any reason. However, remember that for the greatest tax benefits, withdrawing funds should be used for qualified educational expenses.
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For more information about 529 Education Savings Plans, call one of our live U.S.-based investment specialists at (800) 235-8396.
1 In some cases, withdrawals may be subject to state tax. Source: https://www.sec.gov/about/reports-publications/investor-publications/introduction-529-plans#:~:text=One%20of%20the%20benefits%20of,the%20greater%20your%20tax%20benefits.
2 Please note that the 529 Plan Victory Capital offers does not qualify for any state income tax deductions.
