Tax benefits of a 529 plan

529 plans are designed to offer tax benefits and flexibility to families saving for college.

Significant tax advantages
Tax-deferred earnings: The money that you invest in a 529 plan account grows tax-deferred, which means that your money can work harder than in a taxable account (see the chart below).

 

Advantages of tax-deferred growth options, such as a 529 plan, versus taxable growth options

Tax-free qualified withdrawals: You don't pay federal or state taxes on withdrawn money when it's used for a qualified, college-related expense.2

State tax advantages: In addition, many states offer income tax incentives on contributions to their state-sponsored 529 plans. Often, this takes the form of a deduction from your state taxable income or as a credit on your state income tax.3 (Some states recapture deductions and/or credits in certain circumstances such as non-qualified withdrawals; please read the applicable plan's offering document for more specific information.)

Gift tax benefits:
You can contribute $14,000 (single)/$28,000 (married, filing jointly) in a single year without incurring a gift tax. You can also benefit from accelerated gifting where you can make up to five years' worth of gifts ($70,000 if single/$140,000 if married, filing jointly) to a 529 plan account beneficiary in one year without incurring gift taxes.4



1 A plan of regular investment cannot assure a profit or protect against a loss in a declining market.
2 Earnings on non-qualified withdrawals are subject to federal income tax and may be subject to a 10% federal penalty tax, as well as state and local income taxes. The availability of tax or other benefits may be contingent on meeting other requirements.
3 You should consider before investing whether your or the beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program.
4 In the event the donor does not survive the five-year period, a pro-rated amount will revert to the donor's taxable estate. For more information, consult your tax advisor or estate-planning attorney.