Tax benefitsThese plans offer even more benefits than tax deferred earnings and tax-free withdrawals. With a 529 plan, you also gain estate planning benefits, control over the account, flexibility in where the student can use the account's assets, and professional investment management.
Estate planning benefits through accelerated gifting
You can make up to five years' worth of gifts to a 529 plan account beneficiary in one year without incurring gift taxes.1 In other words, instead of the annual $13,000 exemption from the gift tax ($26,000 for married couples, filing jointly), you can contribute five times' that amount ($65,000 if single/$130,000 if married, filing jointly) in one year and elect to apply the contribution against the annual exclusion equally or over a five-year period. Any additional gifts you make for the same beneficiary in that same year or the next four years may be subject to gift or generation-skipping taxes in the calendar year of the gift.
Your assets can be invested for a longer time, which could potentially give them a chance of growing faster than if you'd contributed the annual amount each year.2
Contributions are considered completed gifts and are removed from your estate, but you, as the account owner, still retain control.3
Take a look at the chart below.
Control over the account
- When you are the account owner you have total control over how - and when - the account's assets are used.
- Why is this important? Imagine that your son or daughter suddenly decides to use money intended for college for something other than college, like backpacking across the country or buying a sports car. With a 529 plan, you can decide how and when those assets are used.
Flexible
- A 529 plan's assets can be used at any eligible educational institution across the country, not just in your state, or in the state that sponsors your particular plan.
- If your beneficiary doesn't attend college, any unused portion of your account can be changed to another beneficiary who is an eligible member of the family.4
Affordable
While minimums differ by plan, you can often open an account for as little as $25. There are no income limits restricting who can open a 529 plan.
Easy
You can often enroll online and manage your accounts with virtually 24/7 access. Not all 529 plans offer this feature, but it's worth seeking out. This feature can make managing your 529 plan more convenient - and is the "green" alternative - so check to see if your plan offers it.
Professionally managed
A 529 plan gives you the opportunity to benefit from professional investment managers and administrators.
1 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.
2 Investment returns are not guaranteed, and you could lose money by investing in the Plan.
3 For more information, consult your tax advisor or estate-planning attorney.
4 For a description of who is considered a "Member of the Family," see the Glossary.
5 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.
