A 529 plan is an investment plan for the purpose of education. It can be used for K-12 or for college. Every state has a plan, but as you will see, the advantages (particularly the tax advantages) vary from state to state. Here are 6 things to know about 529 plans.
Different Investment Options
As I said in the first sentence, a 529 plan is an investment plan. However, the investments can be as conservative or as aggressive as you want. In addition to stock mutual funds, there are also money market accounts, CDs, bonds, and target date funds. Take your pick or mix and match!
Maximum Limits
There is a limit to the contributions you can make for the life of the 529 account. This limit varies by state. Currently, the highest is California with a lifetime contribution amount at $529,000. The lowest are Georgia and Mississippi at $235,000.
See maximum contribution limits by state.
Tax Deductions
The tax benefits of 529 plans vary widely by state. The good news is that most states allow for some kind of tax deduction. Some of these states don’t even require that you live there! Some states allow anyone contributing (such as grandparents) to take advantage of the tax benefits while other states allow only the owner of the account to be the receiver of the benefit. The amount of your tax deduction varies from state to state. Get the picture? Taxes and 529s vary wildly from state to state!
See if your state qualifies you for a state tax deductible. This site also has an interactive US map that allows you to click on a state and see that state’s 529 information. Pretty cool!
Related: How Much Is Your State’s 529 Plan Tax Deduction Really Worth?
Anyone Can Open a 529 Account
Some people are under the impression that only parents can open a 529 account for their children. However, anyone can open one. Do the grandparents want to start one? Sure! Godparents? You betcha! Close friends that love and care for that precious baby? They can open one, too!
529 Funds Must Be Used For Education
There are strict guidelines as to what qualifies for an educational expense. Yes, you can use the money for tuition, books, and supplies. No, you cannot use the money for application fees and testing. As long as the money is being used for education, it is tax-free money! If not, you will most likely have to pay taxes and a 10% penalty on the earnings. Yikes!
Can Help Pay Off Student Loans
This can be very helpful to you (depending on your student loan balance, of course. But, hey! Any little bit helps.)! Thanks to the SECURE Act, you can use up to $10,000 of your 529 money to pay off your student loans. Note that the $10,000 limit is a lifetime limit – not a per year limit. Since you can contribute to a 529 at any age, you could contribute money to a 529 after college and use the tax-free money to pay off student loans.
Final Thoughts
A 529 plan can be a fantastic way to pay for college. Starting when the child is very young can mean a nicely cushioned education account by the time that little bundle of joy goes off to college.
If you need help taking back control of your money instead of having your money take control of you, please schedule your free initial consultation to see if we are a good fit for working with you. Don’t lose any more sleep due to money stress and anxiety!
1 thought on “6 Things to Know About 529 Plans”
Thank you so much for this information.
We will definitely be in touch with more details.