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Saving for College? Consider a 529 Plan’s Benefits


July 2013

Saving for higher education is cheaper than borrowing for it, no matter what loan interest rates do in the future. That’s true whether you are saving for a child, a grandchild, a relative, a friend or even yourself. State-administered 529 savings plans offer a number of useful benefits. Let’s take a look.

What is a 529 Plan?

Every state in the U.S. offers at least one of these savings plans. The contributor establishes the plan in the name of a beneficiary but retains control of the funds. The contributions grow tax-free. No federal income tax or capital gains tax is due when funds are used to pay for “qualified higher education expenses.” Such expenses include tuition, fees, books and room and board in 529 savings plans.

The funds may be used for any qualified institution of higher education anywhere in the U.S. not just at in-state public institutions. However, using a plan in-state may provide additional benefits, such as no state taxes on plan earnings. Plans allow for very reasonable minimum contributions, as little $15 to $50 monthly, but also allow large single contributions.

Many states also offer 529 Prepaid Tuition Programs, that enable contributors to purchase future tuition at current prices for the name beneficiary at state schools.

Benefits of 529 Plans

  • Anyone—parents, grandparents, other relatives, family friends—can create an account for a beneficiary.
  • Can be used for expenses for qualified, accredited post-secondary schools and most degree programs—associate's, bachelor's, vocational certificate, professional, and graduate
  • Very flexible contribution requirements.
  • No federal income tax is due when used for qualifying higher education expenses.
  • Little impact on the beneficiary's eligibility for other financial aid such as scholarships, grants, and loans.
  • No age limit.

Who Can Create One? Who Can Benefit?

Typically a parent or grandparent will create a 529 plan for a child or grandchild. Anyone, however, can create an account for a beneficiary. This includes other relatives, family friends, and, in most states, a trust or company.

A 529 plan is established for a single beneficiary, who must be a U.S. citizen or legal resident and must have a Social Security number or federal tax identification number. If you are saving for more than one child, you must establish separate accounts. However, if the beneficiary chooses not to attend college, the plan may be transferred to a member of the beneficiary’s family or the donor may retain use of the funds and pay appropriate tax on the fund’s income.

Funds may be used for expenses for qualified, accredited post-secondary schools and for degree goals that range from associate’s degrees, bachelor’s degrees and vocational certification to professional and graduate school.

What Is the Maximum Contribution Allowed?

529 plans have very flexible contribution requirements. The goal is to give families a regular way to build funds for higher education. Minimum payments as low as $15 monthly in some states (though $50 to $100 is more typical) can help anyone begin to build a nest egg for college. Using payroll deduction or automatic withdrawals from your checking or savings account make saving regularly easy.

529 plans also allow larger contributions which parents and grandparents may wish to use as part of their estate planning. For example, a donor may contribute up to $14,000 annually ($28,000 for a couple filing jointly) without incurring gift tax. To really jump start the account, while removing funds from the donor’s estate, an individual may contribute up to $70,000 at once ($140,000 for a couple), which is equal to five years of allowable tax-free gifts; however, they may make no more contributions for five years.

Maximum contributions to plans range from $146,000 to $305,000, depending on the state. The median allowable contribution is $235,000. This is considerably more than the $2000 annually allowed in a Coverdell Education Savings Account, but a beneficiary may have both a 529 plan and Coverdell ESA.

What Are Other Major Benefits?

  • Tax-advantaged fund growth and distribution. When used for qualifying higher education expenses, no federal income tax is due. Many states provide similar relief from state taxes when funds are used for in-state schools.
  • Little effect on financial aid eligibility. Because the funds are held in the donor’s name, there is little impact, if any, on the beneficiary’s eligibility for other financial aid, such as scholarships, grants, and loans.
  • No age limit. Funds may be established for individuals of any age, not just minor children. Funds need not be distributed when the beneficiary reaches a certain age. (Coverdell ESAs must be distributed when beneficiaries reach age 30.)
  • Flexible investment options. Each state’s plan(s) is managed by professional advisors, but age-based and risk-based investment options are provided for account owners. Account owners may select different options over time.
  • Reduced reliance on student loans. Savings earn you interest. Loans cost you interest. The more saved funds you can put toward a child’s higher education, the lower the debt (if any) the child will need to take on to get a higher education.

What Are the Steps to Set Up a 529?

  • Establish your savings goals.
  • Compare 529 plans to see which will best help you meet your goals. Start with your state then look at others. You can compare plans by feature and by state at, a website sponsored by the College Savings Plan Network. Be sure to check account fees as these may be more expensive with some plans than others.
  • Set up the plan of your choice. You may typically open an account directly with the state plan. You may also wish to consult your investment advisor about education savings options including 529 plans. A financial representative a BayPort Financial will be happy to talk to you about such options.

Yes, Higher Education Is Still Important

A number of recent editorials and news articles have questioned the value of a higher education. Usually, these sources challenge the value of college to reaching career goals and earnings. But one fundamental fact remains: people who get higher education typically earn more. How much? U.S. census figures indicate that on average people with a four-year degree earn 63 -70% more annually than high school graduates. For almost everyone that results in earning at least $1 million more over a lifetime. So, it’s time to start saving!

For More Information provides extensive information about 529 plans and enables comparison by state and feature. The College Saving Plans Network is sponsored by the National Association of State Treasurers. provides information on all types of education savings options, including 529 plans.

IRS Publication 970: Tax Benefits for Education provides information about tax benefits for 529 plans and other plans and programs.

Financing Higher Education from our Family and Parents Guide provides a brief overview of many options for financing higher education.

Reviewed August 2014.

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