529 College Savings Plan

Features and Benefits

529 College Savings plans are a tax-advantaged investment vehicle designed to help you meet the challenges of saving and investing for the costs of higher education. 529 Plans were established by Congress in 1996 in recognition of the escalating costs of higher education and named for Section 529 of the Internal Revenue Code. These plans are created by states. Additionally, certain education institutions sponsor their own qualified tuition programs that generally apply specifically to that institution. Although each state determines particular plan features, like contribution maximums, there are some similarities. The following features are common to all 529 Plans:

Flexibility:
  • Anyone can contribute – Any U.S. citizen or legal U.S. resident can establish a 529 Plan on behalf of an individual beneficiary, including parents, grandparents, other relatives and friends. There are no adjusted gross income limits for account owners.
  • Investments can be used at a wide range of higher education institutions – When a student is ready for college the money accumulated in a 529 Plan account can be withdrawn to pay for qualified higher education expenses at any accredited college, university, professional or technical school in the U.S. or overseas.
Income Tax Advantages:
  • Tax-deferred growth – Account earnings grow free from federal income taxes.
  • Tax-free qualified withdrawals – Withdrawals used to pay for qualified higher education expenses are federally tax-free. (Note: For non-qualified withdrawals, the earnings portion is subject to federal income taxes and a 10% federal excise tax penalty. Also, state and local taxes may apply.)
  • State Tax Advantages – Investors may enjoy additional state or local tax benefits for participating in their own state’s plan.

    If an account owner or the beneficiary resides in or pays income taxes to a state that offers its own 529 college savings or pre-paid tuition plan (an "In-State Plan"), that state may offer state or local tax benefits, but only for participation in the In-State Plan. These tax benefits may include deductible contributions, deferral of taxes on earnings and/or tax-free withdrawals. In addition, some states waive or discount fees or offer other benefits for state residents or taxpayers who participate in the In-State Plan. An account owner may be denied any or all state or local tax benefits or expense reductions by investing in another state's plan (an "Out-of-State Plan"). In addition, an account owner's state or locality may seek to recover the value of tax benefits (by assessing income or penalty taxes) should an account owner rollover or transfer assets from an In-State Plan to an Out-of-State Plan. While state and local tax consequences and plan expenses are not the only factors to consider when investing in a 529 Plan, they are important to an account owner's investment return and should be taken into account when selecting a 529 plan.
Gift and Estate Tax Benefits
Account owners can contribute up to $13,000 annually ($26,000 for married couples filing jointly) to a 529 Plan account of any beneficiary in a single year without incurring federal gift taxes. Subject to special rules, 529 Plan account owners can contribute five times the annual gift amount all at once — $65,000 per beneficiary ($130,000 for married couples filing jointly) without incurring federal gift taxes.

The donor must elect this special treatment on a gift tax return filed after the gift is made and cannot make any other tax-free gifts in the 5-year period following the gift. If the donor dies within the 5-year period after such a gift is made, a pro rata portion of the gift must be added back into the donor's estate. Therefore, the completed gift is excluded from the donor's estate for estate tax purposes.

High Contribution Limits
High contribution limits allow clients to add to their investment until the account value reaches the state-mandated maximum amount. Many states allow contributions in excess of $250,000. Earnings may continue to accumulate beyond this limit.

Account Control
The account owner maintains control at all times, even after the beneficiary turns age 18. If the beneficiary elects not to attend college, the account owner can choose to change the beneficiary to another family member, gift the investment or liquidate the account. (Note: Non-qualified withdrawals may be subject to federal income and other taxes.)




Disclosure: ABP does not render advice on tax and tax accounting matters to clients. This material was not intended or written to be used and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Tax laws are complex and are subject to change. This information is based upon current tax rules in effect at the time this was written. ABP and its Financial Advisors do not provide tax or legal advice. Individuals should always check with their tax or legal advisor before engaging in any transaction involving 529 Plans, Education Savings Accounts and other tax-advantaged investments.

Our college planning and education funding solutions are not financial planning (unless they are prepared using financial planning software approved by ABP). As a brokerage service, they do not create an investment advisory or a fiduciary relationship (including under ERISA) between you and ABP.

Investment in a 529 Plan are not FDIC-insured nor are they deposits of or guaranteed by a bank or any other entity, so an individual may lose money. Please read the issuer’s official statement carefully before investing. The issuer’s official statement contains more information on municipal fund securities including: investment objectives, risk factors, charges and expenses and possible tax consequences associated with municipal fund investing.