Wealth &
Protection Planning

529 College Savings Plans

Description

A 529 college savings plan is a state operated investment plan designed to help families save for future college costs.  As long as the plan satisfies a few basic requirements, the federal tax law provides special tax benefits to plan participants (Section 529 of the Internal Revenue Code). 

Each state decides whether to offer a 529 plan, or possibly more than one, and what it will look like.  Every state has made this commitment, although a few are not yet in operation. 

Four main advantages to using a 529 college savings plan:
  • Income tax breaks
    • Investments grow tax-free for as long as the money stays in the plan. When the plan makes a distribution to pay for the beneficiary's college costs, the distribution is federal tax-free as well.
    • Each state may offer tax breaks (such as an upfront deduction for contributions or income exemption on withdrawals) in addition to the federal treatment.
  • Donor control of the account
    • With few exceptions, the named beneficiary has no rights to the funds. The participant decides when withdrawals are taken and for what purpose. Most plans allow the participant to reclaim the funds at any time. However, the earnings portion of the "non-qualified" withdrawal will be subject to income tax and an additional 10 percent penalty tax.
  • Simple way to save for college
    • Once the decision for which 529 plan to use is made, the participant completes a simple enrollment form and makes his or her contribution. The ongoing investment of the account is handled by the plan, not the participant. Plan assets are professionally managed either by the state treasurer's office or by an outside investment company hired as the program manager. The participant will not receive a Form 1099 to report taxable or non-taxable earnings until the year withdrawals are made.
    • If the participant wants to move his or her investments around, he or she may change to a different option in a 529 savings program every year (program permitting) or they may roll over the account to a different state's program as often as once every 12 months. There is no federal limit on the frequency of these changes if the account beneficiary is replaced with another qualifying family member at the same time.
  • Almost everyone is eligible to take advantage
    • Almost everyone is eligible to take advantage of a 529 plan, and the amounts you can put in are substantial. Many state plans allow more than $200,000 per beneficiary. Generally, there are no income limitations or age restrictions.

Contact a STRIVE Wealth Advisor for more information about 529 College Savings Plans. 

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