- Anyone who is a U.S. citizen or resident alien with a valid social security number or taxpayer identification number who is 18 years or older can open a 529 college savings plan.
- Eligible investors of can typically participate in the 529 plans of any state, and funds can be used for qualified expenses at any eligible institution nationwide.
- Account owners can change the beneficiary to an eligible family member of the original beneficiary without incurring federal taxes or penalties.
- There are federal tax advantages to 529 plan earnings, and some states offer tax savings on contributions.
Saving for college can feel like an uphill battle, but fortunately, there are tax-advantaged savings programs available to make the process easier for your family. One of the most popular is the 529 plan, which gets its name from the relevant section of IRS tax code.
Custodians and Beneficiaries
Think of the 529 college savings plan as a dedicated account set aside for the sole purpose of funding higher education expenses. Any U.S. citizen or resident alien who is 18 years or older with a valid social security or tax identification number can open one of these plans, and there are no restrictions on who you name as your beneficiary. In fact, you can even open a plan for yourself.
Each account can have only one beneficiary, so you may need to open separate 529 plans for each student you plan on supporting. On the other hand, more than one person can open separate accounts for the same beneficiary. For example, if parents open a 529 plan for their child, grandparents, friends and other family members can also open separate plans for the same child. However, there is a maximum contribution limit across all accounts for a single beneficiary. This depends on the specific plan, but the annual limit ranges from approximately $200,000 to $500,000.
The 529 plan was created with flexibility in mind, and your beneficiary choice is not locked in. This is helpful, since educational goals may change. You can change the beneficiary of any 529 accounts to an eligible family member of the original beneficiary without incurring federal taxes or penalties. It is also possible to roll any excess 529 funds into the account of a family member.
Restrictions Based on State of Residence
Though 529 plans were created through federal regulation, each state administers its own plan. As a result, plans differ in fees, quality of management and investment options. Fortunately, there is typically no residency requirement to participate in any state’s plan, so you can shop around to find the best value.
No matter where you live or which state’s 529 plan you use, your savings can be applied to qualified expenses at any eligible education institution. The list of eligible schools includes public and private colleges and universities all over the country, as well as a few international options. Certain vocational programs may also qualify for payment through 529 savings. Qualified expenses for 529 plans include tuition, mandatory fees, housing, meal plans, and under certain circumstances, the purchase of computers.
Contributions and Tax Benefits
The most popular 529 benefit is the federal tax savings. Contributions are made with after-tax dollars, but earnings grow free of federal taxes. This means if distributions are used for qualified expenses at eligible schools according to plan requirements, there are no federal taxes assessed on your withdrawals. In addition, some states also wave state taxes on withdrawals for qualified expenses.
Some states waive taxes on contributions to 529 plans as well, which can add to the total overall savings. While this is usually only a benefit if you choose the plan offered by your state of residence, a handful of states do not tax contributions on plans opened by residents of any states.
Though there are no federal contribution limits for 529 plans, some states do impose contribution limits on their state-specific programs. These are typically quite high, ranging from approximately $200,000 to $500,000. Keep in mind that contributions above a certain amount may be subject to a gift tax. For 2016, each individual can gift up to $14,000 before any gift taxes are due. You can maximize the value of compounding interest by superfunding your 529 plan when you enroll. This special rule permits you to make up to five years of contributions at once – a total of up to $70,000 per person per beneficiary in 2016 – before any gift taxes are assessed.
Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients.
This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.
For information on any 529 college savings plan contact the plan provider for details on the investment objectives, risks, charges, expenses, and other important information included in the Plan Description and Participation Agreement; read and consider it carefully before investing.
Please Note: Before investing in any 529 plan, you should consider whether you or the beneficiary’s home state offers a 529 plan that provides its taxpayers with favorable state tax and other benefits that are only available through investment in the home state’s 529 plan. You also should consult your financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plans’ features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.
Earnings on nonqualified withdrawals are subject to federal income tax and may be subject to a 10 percent federal tax penalty, as well as state and local income taxes. The availability of tax and other benefits may be contingent on meeting other requirements.