529 plans are the superstars of college saving. You can accumulate substantial money—or pre-pay tuition—and get tax and financial aid breaks.
529 plans are designed to encourage college saving. They offer tax breaks, high investment limits, and flexibility—and they have a low impact on government aid calculations.
The Two Types of 529 Plans
529 college savings plans help you save for college. Plans are state-sponsored but are usually managed by an investment company. You can choose from a variety of mutual funds, and you can enroll in a plan from any state. The median cap on contributions to a 529 savings plan is $235,000.
529 prepaid tuition plans cover future college tuition at today's prices. Some states offer these plans for their public colleges. Some private colleges accept a prepaid tuition plan called the Private College 529 Plan. Contribution caps vary by plan, but are typically anywhere from $50,000 to $100,000.
Rules for Using 529 Savings Plan Money
529 money must pay for "qualified education expenses." You can spend 529 money on tuition, fees, room and board, books, supplies, and required equipment at any eligible institution of higher education. The money can't be used for expenses already covered by financial aid.
529 money used before college starts or for ineligible expenses incurs a ten percent penalty. Plus, that money will be taxable. If the student does not need the money, you can transfer the account to another beneficiary in the family, including a parent.
Effects of 529 Plans on Financial Aid
529 accounts owned by parents or a dependent student have little impact on your aid eligibility. When the government calculates your financial need, it will count only a small percentage of assets in 529 plans and will not consider withdrawals made during college as income.
529 accounts owned by others can significantly impact your aid eligibility. Withdrawals spent on the student's behalf from accounts owned by anyone other than the student or parent are counted as student income. This can reduce aid eligibility by as much as 50 percent of the amount withdrawn. Such funds are best used after the student's junior year of college—when they won't affect aid calculations.
529 accounts may impact financial aid at private colleges. Many private colleges use an aid calculation that asks about all 529 accounts that benefit the student, regardless of ownership.
Getting Your 529 Tax Break
Contributions to 529 plans grow tax-deferred and can be tax-free. Up to $14,000 per year placed in a 529 account is not taxed by the federal government. 529 funds remain tax-free when spent on eligible college expenses. (The tax benefit, however, must be shared with any other federal education tax breaks the student is eligible for.)
529 Savings Plan Investment Rules
Contribution limits are generous. You can open a 529 savings account with as little as $25 and add up to $14,000 a year ($28,000 for joint filers) without incurring gift tax. Or you can make a one-time contribution up to $70,000 ($140,000 for joint filers) without incurring gift tax.
Investment changes are allowed. Plan owners are allowed to change their investment strategies twice a year or at other times under certain circumstances, such as a change in beneficiary or a rollover from another state plan.
Transfers from other college savings are allowed. You can transfer money from certain tax-free college savings accounts into a 529 account without penalty.
Watch Out for Fees
Some 529 savings plans have high administration fees that can eat into your earnings. Many plans waive one or more of these fees, or combine them into one "management fee."
- To see other college savings options, visit Planning Ahead to Pay for College.
- To research 529 plans, visit collegesavings.org, which lists all the 529 plans by state.
- For a list of private colleges with 529 pre-paid tuition plans, see privatecollege529.com.
Note: Financial information provided on this site is of a general nature and may not apply to your situation. Contact a financial or tax advisor before acting on such information.