Broker Check

529: A Tax-Advantaged Savings Plan for College

| November 05, 2019

The ability to be able to afford paying for a college education is a hot topic in today’s society, as many students are incurring student loan debt, while the tuition costs of college continue to skyrocket. Just as saving for retirement is important, having money saved to cover future educational costs can work to your advantage, as well. For those who plan to have children or may already have children with plans to attend college, a 529 plan is something worth considering.

What is a 529 Plan?

A 529 plan is a tax-advantaged savings plan that is designed to help and encourage individuals to start saving today for educational expenses further down the road. These plans are typically sponsored by the state and offer two different options.

What 529 Plan Savings Options are Available?

The first type of plan is a Prepaid Tuition Plan. A Prepaid Tuition Plan is exactly what it sounds like. It allows an individual to buy college/university credits at today's price for tuition and fees that will have to be paid by the beneficiary further down the road. It is important to consider that these credits cannot be applied to the cost of room and board (in most cases), nor can they be used for elementary and secondary education.

The second type of plan is an Education Savings Plan. An education savings plan allows an individual to open an investment account to begin saving for the designated beneficiary. The money in these accounts may be used at any college or university for all qualified educational expenses (tuition, room and board, mandatory fees, books, computers, software, etc.). In addition, these specific plans can be used to pay for elementary or secondary education, up to a max amount of $10,000 per year per beneficiary.

Are there Fees/Expenses Associated with 529 Plans?

Prepaid Tuition Plans may or may not include enrollment/application fees, and ongoing administrative fees.

Education Savings Plans may or may not include enrollment/application fees, account maintenance fees, ongoing program management fees, and/or asset management fees. If purchasing an education savings plan from a broker, you may also be subject to additional investment advisory related expenses.

Understanding Taxes in 529 Plans (Vary by State):

  • Contribution benefits to a 529 may include being permitted to deduct the contributions from state income tax, depending on your state.
  • Withdrawals from 529 plans that are used for higher educational expenses or tuition are not subject to federal income tax, and in many cases, will also not be subject to state income tax.
  • Ability to generate tax-free earnings, if the money is used for qualified educational expenses.
  • If 529 plan earnings are not used for qualified educational expenses or tuition, the earnings could be subject to federal and state income tax, as well as a 10% federal tax penalty.

This purpose of this blog is provide a basic overview of 529 plans, which are a great way to begin saving for college and higher educational expenses. It is important to keep in mind that different rules and restrictions may vary by state. If you are considering investing in a 529 plan, consult a tax professional or financial advisor to ensure that you choose the option that best fits your needs. It is also recommended that you understand that rules are implemented by the state of your residence, as well as fees, tax implications, and additional expenses that apply specifically to your plan.