Saving for College

A Gift That Keeps Giving: 529 College Savings Plans

Looking for that perfect gift for your family's youngest members? Consider giving the gift of education with a 529 college savings plan. It's a flexible and convenient way to help them cover college costs that may also provide you with some financial benefits.

Here are six reasons why you might consider opening 529 plans for your loved ones:

1. Tax benefits

Assets in a 529 plan can grow tax-deferred. What's more, withdrawals are tax-free if the money is used for qualified education expenses.

2. Ease of changing beneficiaries

The account holder can change the beneficiary without penalty. If you open a 529 plan for your son but he decides not to go to college, you can transfer the money to another loved one or use it to further your own education.

But be sure to use the money for qualified education expenses: Otherwise withdrawals of investment earnings will trigger income tax and a 10 percent federal tax penalty.

3. Certainty

Investors enjoy peace of mind knowing their money will be spent on education costs such as tuition and fees, textbooks and in some cases, room and board. "The money is really going toward the recipient's future in a way that deposits in a savings account can't," says Reyna Gobel, author of How Smart Parents Pay for School.

4. Choice of investments

You can invest 529 plan assets in age-based portfolios or a selection of mutual funds, which gives you more control than many other savings vehicles.

5. Estate benefits

Account holders can give substantial assets without gift- or estate-tax repercussions. Ordinarily, gifts of more than $13,000 within one year ($26,000 per married couple) reduce the giver's lifetime gift- and estate-tax exemptions. But special rules for 529 plans allow five times that amount at once: An individual can give up to $65,000, and a couple up to $130,000, to each beneficiary in a single year without triggering any gift- or estate-tax liability.

This provides a tax-efficient way to transfer wealth during your lifetime. But be aware that additional gifts to the beneficiary in the following five years, including contributions to the 529 plan, will eat into your gift- and estate-tax exemptions.

6. Financial responsibility

Contributing to a 529 plan provides you an opportunity to teach the next generation about saving and investing. "These lessons stick with you if you learn them at a young age," says Gobel. To interest younger children, Gobel suggests printing your contribution and giving it with a small toy.

Before investing, investors should consider whether their home state or their designated beneficiary's home state offers any state tax or any other benefits that are only available to residents of that state. Any state tax benefits associated with a 529 plan apply only to residents of the state sponsoring the plan. 529 plans value will fluctuate so that an investor's shares, when redeemed may be worth more or less than their original cost.

Investors should consider the investment objectives, risks, and charges and expenses of the plan carefully before investing. An official statement, which contains this and other important information, can be obtained from your financial professional. Please read carefully prior to investing.

Withdrawals may be subject to state income taxes depending on the participant's state of residence. Non-qualified withdrawals are subject to a 10% penalty.

Participation in a 529 plan does not guarantee that contributions and the investment return, if any, will be adequate to cover future tuition and other higher education expenses or that a beneficiary will be admitted to or permitted to continue to attend and institution of higher education.

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.


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