Top benefits of 529 plans

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1. 529 plans offer unsurpassed income tax breaks.

Although contributions are not deductible, earnings in a 529 plan grow federal tax-free and will not be taxed when the money is removed to pay for college; meanwhile, alternative savings vehicles such as mutual funds will lose a portion of their earnings to annual income taxes and face a capital gains tax at withdrawal.

2. Your own state may offer additional tax breaks.

In addition to federal tax savings, thirty-five states (including the District of Columbia) currently offer residents a full or partial tax deduction or credit for 529 plan contributions. You can generally claim state tax benefits each time you contribute to your plan, so it’s a smart idea to continue making deposits until you’ve paid your last tuition bill.

Be sure to research all of your options. If your state doesn’t offer benefits for residents, you can choose any other state’s plan!

3. You, the donor, stay in control of the account.

With few exceptions, the named beneficiary has no legal rights to the funds so you can assure the money will be used for its intended purpose. A 529 account owner can withdraw funds at any time for any reason, but keep in mind that the earnings portion of non-qualified withdrawals will incur income tax and an additional 10% penalty tax.

4. 529 plans require little maintenance.

A 529 plan is a very hands-off way to save for college. Most plans allow you to “set it and forget it” with automatic investments that link to your bank account or payroll deduction plans. You’ll be able to manage these contributions and watch your savings grow through the Gradvisor platform.

5. You’ll face simplified tax reporting.

Contributions to a 529 plan do not have to be reported on your federal tax return. You won’t receive a Form 1099 to report taxable or nontaxable earnings until the year you make withdrawals.

Deposits to a 529 plan up to $14,000 per individual per year ($28,000 for married couples filing jointly) will qualify for the annual gift tax exclusion. Meanwhile, those looking to reduce estate taxes can elect to treat a 529 plan contribution between $14,000 and $70,000 as though it were made over a five calendar-year period to qualify for the annual gift tax exclusion.

6. 529 plans allow you to save with flexibility.

You can change your 529 plan investment options twice per calendar year, and rollover your funds into another 529 plan once per twelve-month period.

7. Everyone is eligible to take advantage of a 529 plan.

Unlike Roth IRAs and Coverdell Education Savings Accounts, 529 plans have no income limits, age limits or annual contribution limits, though lifetime contribution limits vary by plan and can range from $235,000 to $400,000.