529 college savings plans
For Americans interested in saving for education, 529 savings plans are one of the most popular account types. They're usually sponsored by states (just about every state has one) and managed by mutual fund companies. The majority of 529 savings plans are "direct sold," giving people like you the chance to open a 529 account without going through an advisor.
You can save in any state's plan no matter where you live, and you can use your savings to pay for school expenses in any state (even internationally). So be sure to consider other states' plans if you find out that your state doesn't offer any state tax benefits or that it offers benefits regardless of the plan you choose.
What do you get?
State and federal tax breaks
- Deduct contributions on your state tax return, depending on your state's rules.
- Grow your account balance without paying federal or state taxes on the earnings until you withdraw the money.
- Withdraw the money tax-free (both federal and state) when you use it for qualified education expenses.
- Make up to 5 years' worth of contributions at one time without triggering gift taxes.**
A variety of uses
Use the account to pay for a wide variety of eligible schools, including private schools, colleges, universities, graduate school, religious schools, and trade or technical schools. You can also use the money to pay for room and board, fees, books, qualified student loan repayments, apprenticeship programs, and other eligible educational expenses.
Save for anyone
Start saving for a child, grandchild, other family member, friend—even yourself.
Keep control of when and how your money is spent, no matter how long the money stays in the account.
High contribution limits
Maximize your savings by contributing as much as you want. Contribution maximums are high—usually between $200,000 and $400,000 per beneficiary. And you can contribute up to $75,000 ($150,000 for married couples) at one time without triggering gift taxes (as long as you treat it as though you contributed that amount over a 5-year period.)**
Low impact on financial aid
Lessen the impact your savings have on financial aid—529 accounts are considered assets of the parents (if the student is a dependent).
Choose from portfolios that have stock, bond, and international exposure—giving your college money a chance to grow.
Have the choice of investing in a Target Enrollment Portfolio, which gradually shifts your asset mix to be more conservative as your child nears the enrollment year.
Access to your money
Withdraw your money for any reason at any time, although you may pay taxes and penalties (on your account earnings but not your contributions) if you're not using it for enrollment at an eligible educational institution.†
Keep in mind:
Some 529 savings plans are sold through investment advisors—you can usually identify them by the word "advisor" in the plan's name. You'll almost always be better off in a direct-sold plan because the expenses tend to be significantly lower. However, an advisor plan could be a better choice for you if you:
- Want to save in your state's plan to get a tax break and your state's advisor plan has lower expenses than the direct-sold plan.
- Want to save in your state's plan to get a tax break but you're not happy with the investments offered through the direct-sold plan.
- Invest through an advisor who prefers to use the advisor-sold plan.
What if you don't use the money for education?
If you decide not to use your savings for enrollment at an eligible educational institution, or you need the money for something else, you can always get it back.
However, you may have to pay a 10% federal penalty tax on any earnings in your account as well as federal income tax (on earnings) and state income tax (on earnings and any contributions you originally deducted) if you withdraw the money to pay for nonqualified expenses.
If you want to avoid the penalty and taxes, you do have some other options. You can leave your money in the account in case your child decides to attend school later—there's no age limit on when it can be used. Or you can transfer the account to an eligible family member, like a sibling or first cousin. The money can also be used for other forms of education, like K-12, private grade school, college, graduate school, trade school, vocational school, or apprenticeship programs and other eligible educational institutions.
How do you pick a plan?
Choosing the best plan for you takes only a few steps. You'll want to start by seeing what your state's rules are.
529 prepaid tuition plans
As the name suggests, prepaid tuition plans are a type of 529 plan that lets you pay for tuition at today's price and use it for school in the future.
If you think the earnings on your investment will be lower than the rate at which tuition rises, this could be a good option.
Unlike 529 college savings plans, however, prepaid tuition plans:
- Can only be used by residents of the state sponsoring the plan. (Some plans require only the beneficiary to be a state resident.)
- Can only be used for colleges and universities covered by the plan—usually state schools.
- Can usually only be used for tuition—not room and board, fees, or books.
What about school-specific programs?
Some schools have now started to offer their own prepaid tuition programs. However, school-specific plans are exactly that—they can only be used at a particular school or group of schools.
Find the right account for you
The yearly, monthly, or weekly amounts you save in your account.
The investment returns you accumulate on the savings in your account.
Money you can take out of your account without owing any federal income tax, even if some of it has never been taxed.
For college-specific accounts, certain kinds of expenses will be considered "qualified," and using money to pay them won't result in taxes and penalties. Qualified expenses could include room and board, books, and fees along with tuition. Costs for trade or vocational schools could also be considered qualified depending on the type of account.
The person you're opening the account for, or the future student. This person doesn't have control of the money in the account, but can use the money from the plan for school costs. The account owner controls the money on behalf of the beneficiary.
The way your account is divided among different asset classes, including stock, bond, and short-term or "cash" investments.