A 529 college savings plan offers unique tax advantages for individuals investing money for college. 529 refers to Section 529 of the Internal Revenue Code. By federal law, all 529 college savings plans must be state sponsored. Residents of any state can invest in any state's 529 College Savings Plan: You do not have to be a resident of a particular state to invest in that state's plan. However, there may be state tax advantages available only to state residents for any particular state sponsored plan. With all 529s there is no income limit for participation. You can even open an account for yourself.
529 College Savings Plans vary in a number of ways, including contribution limits to the account (defined by the states), fees, in-state tax treatments such as a state tax deduction, and investment portfolios offered.
Generally, any individual with a Social Security Number or federal Taxpayer Identification Number who is a U.S. citizen or resident alien can open an account and contribute to a 529 College Savings Plan account on behalf of a beneficiary. You can even open an account for yourself.
Yes, with most plans you can change the beneficiary or transfer a portion of your investment to a different beneficiary, provided the new beneficiary is an eligible "member of the family" of the previous beneficiary.
A "member of the family" of a Beneficiary is a person related to that beneficiary as follows: (1) a child or a descendant of a child; (2) a brother, sister, stepbrother or stepsister; (3) the father or mother, or an ancestor of either; (4) a stepfather or stepmother; (5) a son or daughter of a brother or sister; (6) a brother or sister of the father or mother; (7) a son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law; (8) the spouse of any of the foregoing individuals or the spouse of the Beneficiary; or (9) a first cousin of the Beneficiary. For this purpose, a child includes a legally adopted child and a stepson or stepdaughter, and a brother or sister includes a half-brother or half-sister.
The maximum amount you can invest is determined by the specific state plan you choose and varies from state to state. For many plans, the limit is $200,000 or more for all accounts in the plan for a beneficiary.
If the beneficiary of an account does not attend college, the account owner may name another beneficiary for the account who must be a certain member of the family of the beneficiary that is being replaced. Otherwise, if the funds are withdrawn for a purpose other than to pay for qualified higher education, then the earnings portion of the withdrawal is subject to federal income tax and an additional 10% federal tax. There may also be state tax consequences. Please consult with a qualified tax advisor.
If the beneficiary receives a scholarship and you take a withdrawal from the account in the amount of the scholarship, the earnings portion of the withdrawal is subject to federal income tax but will not be subject to the additional penalty tax. There may also be state tax consequences. Please consult with a qualified tax advisor.
With a college savings plan, you contribute to an account that you can eventually tap to pay for qualified higher education expenses at any accredited college, university or trade school in the U.S and eligible schools abroad.
Contributions to a college savings plan are not deductible for federal income tax purposes, but some states may allow their residents to deduct contributions for state income tax purposes. (Certain limitations apply. Check with your state to determine what limits currently apply.)
The earnings on amounts withdrawn, if used for qualiﬁed higher education expenses are exempt from federal, and state income taxes.
Qualiﬁed higher education expenses include, among other things, tuition, fees and certain room and board charges. If money from a college savings plan account is used for nonqualiﬁed purposes, earnings on that money become subject to federal and state income tax in addition to an additional federal 10% tax. Likewise, a nonqualified distribution could be treated as income and subject to a penalty by your state.
Contact the school to determine if it qualifies as an eligible educational institution or use the Federal School Code Search on the Free Application for Federal Student Aid (FAFSA) website at fafsa.ed.gov.
Qualified higher education expenses include tuition, fees, and the cost of books, supplies, and equipment required for the enrollment and attendance of the Beneficiary at an eligible educational institution, and certain room and board expenses. Qualified higher education expenses also include special needs services in addition to enrollment and attendance costs of a beneficiary who is a special needs beneficiary in connection with the beneficiary's enrollment or attendance at an eligible institution. For this purpose, an eligible educational institution generally includes accredited postsecondary educational institutions offering credit toward a bachelor's degree, an associate's degree, a graduate-level degree or professional degree, or another recognized postsecondary credential.