Before investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings.
College is an investment for a lifetime – the gift of a college education can open the door to a world of opportunity for your child or grandchild. Saving, even a little at a time, can make a big difference down the road. With the cost of a college education continuing to increase, the key is to start saving early and regularly.
What is a 529 Plan?
A 529 plan is a tax-advantaged investment plan designed to encourage saving for the future higher education expenses of a designated beneficiary (typically one’s child or grandchild). The plans are named after Section 529 of the Internal Revenue Code and are administered by state agencies and organizations.
All withdrawals from 529 plans for qualified education expenses will remain free from federal income tax!
Q) Can anyone open a 529 account?
A) A 529 account can be opened by anyone. Grandparents, other relatives or family friends can all be account owners, or simply choose to contribute to an existing account.
Q) What are the most common investment options offered by Section 529 savings / investment plans?
A) The most common investment option is the age-based allocation strategy in which the age of the beneficiary determines the specific mix of investments. As the child ages, your investment mix is automatically reallocated and becomes more conservative as the beneficiary approaches college. There are many other options available, including 100% equity funds, fixed income funds, stable value funds, as well as a variety of equity and fixed income options within many plans.
Q) What are some of the potential drawbacks of Section 529 savings / investment plans?
A) Potential drawbacks include: potential high fees, limited investment options, impact on financial aid eligibility andtaxes and penalties if not used for approved educational expenses (specifically, tuition, room and board, supplies and equipment that are required for enrollment). Such withdrawals are subject to income taxes and a 10 percent penalty.