529 Plan Benefits

A 529 plan, also known as a qualified tuition program or QTP, is one of the best ways to save for higher education today.  The flexibility and unique benefits of 529 plans, allow accountholders to cope with the rising costs of a college education, while remaining very much in control of their money.

In this publication, we're going to talk about the benefits of 529 college savings plans.  We're going to start that discussion with a brief overview of these plans.  Next, we'll talk about the advantages this program provides to families saving for college.  Then we'll finish up with a discussion of contribution limits, income taxes, and withdrawals.

529 Plan Overview

The 529 college savings plan is structured as a flexible, tax-advantaged, college savings program.  The 529 offers investors the benefits of tax-deferred savings, estate planning features, and extremely high contribution limits.  Unlike many other savings plans, a 529 has no income limits to restrict an individual's eligibility to contribute to a plan.

There is no doubt that college costs are continuing to rise at a rapid pace.  For those families that want to send a loved one to college someday, the benefits of a 529 plan are hard to beat.

529 Advantages

Listed below are just some of the many advantages that a 529 plan has to offer investors trying to save for college:

• Maximum contribution limits are very high, up to $120,000 in a given tax year and $250,000 per beneficiary.
• Money in a 529 plan can grow on an income tax free basis.
• Account balances are often protected from bankruptcy proceedings.
• Accountholders retain control of the assets in the plan, not the beneficiary.
• Designated plan beneficiaries can be changed at any time.
• Some states allow for tax free withdrawals from 529 plans if they are used for expenses at a qualified higher education institution.
• Money in the account can be used in over 800 foreign / overseas schools as well as over 8,000 schools located in the United States.
• 529 account balances can be used to pay for tuition, room and board, fees, books and any other supplies necessary for attending a class.

That's quite a list, and there is no doubt that 529 plans are an extremely useful savings mechanism if you're trying to set aside money earmarked for college.  That being said, let's take a closer look at some of these 529 benefits in a little more detail.

529 Plan Contribution Limits

Contribution limits may vary, depending on the plan chosen. However, it is possible to find 529 plans that allow investors to contribute over $330,000.   Future contribution limits will vary based on the current costs of tuition at graduate and undergraduate schools.

Gift Tax Contributions

Contributions may also be eligible for the gift tax exclusion.  In general, you can contribute up to $12,000 ($24,000 for married couples) for each beneficiary in a single year without federal gift tax consequences.  You can also accelerate five years worth of gifts by contributing up to $60,000 ($120,000 for married couples) in the first of a five-year period.

Tax Deferred Earnings and Withdrawals

The earnings on a 529 plan grow on a tax deferred basis, just like a traditional IRA or a 401k plan.  In addition, all earnings are exempt from federal income taxes if the earnings are used to pay for qualified higher education expenses.

In fact, withdrawals can be made at any time from a 529 plan.  However, those earnings that are not used to pay for qualifying education expenses will be taxed and subject to a 10% penalty.

Control of Funds

Another benefit of a 529 plan is that the investor remains in control of the account. Unlike other accounts, such as those covered under the Uniform Gifts or Transfers to Minors Act, qualified withdrawals may only be used by the beneficiary to pay for higher education.   In addition, the beneficiary never takes control of the account; it remains in control of the owner of the account.

Finally, the account owner can change the beneficiary of the account to any other member of the former beneficiary's family without penalty, and at any time.  This would include siblings, parents, and cousins of the beneficiary.

To summarize, the 529 plan is truly a flexible and effective way to start saving for the college expenses of a loved one.  There is a reason that everyone's talking about 529 plans.  The benefits and advantages of these plans are hard to beat.

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