Yes, they can be an excellent way to save for college. 529 savings plans let you save money for college in an individual investment account that offers federal tax advantages. 529 plans are established by individual states and managed by an experienced financial institution designated by the state. Plans may have slightly different features but essentially work the same way.
You (or anyone else) open an account in your child's name and contribute as much money as you want, subject to the plan's lifetime limit. You select from a variety of investment portfolios depending on your risk tolerance or other factors that are important to you. Most plans offer age-based portfolios whose underlying investments automatically become more conservative as your child gets closer to college.
529 savings plans are popular because they combine many desirable tax features with the ability to use the money at any accredited college in the country or abroad. Your contributions grow tax deferred and withdrawals are tax-free at the federal level if used to pay the beneficiary's qualified education expenses. Many states also add their own tax benefits, such as a tax deduction for contributions and exemption of the earnings from state income tax. However, if a withdrawal isn't used to pay the beneficiary's qualified education expenses (known as a nonqualified withdrawal), the earnings portion of the withdrawal is subject to a 10% federal penalty and is taxed as income at the rate of the person who receives the withdrawal (a state penalty and income tax may also apply).
There are no income limits that determine whether you are eligible to open a 529 account — everyone is eligible. And if your child decides not to go to college or gets a scholarship, the money in the account can be transferred to a qualified family member without penalty.
But investment returns aren't guaranteed. By law, 529 plans are authorized — but not required — to let you change the investment options on your existing contributions twice per calendar year. (Plans are also free to let you change your investment option for future contributions at any time.) If your plan doesn't provide this flexibility, then you are allowed by law to roll over your existing 529 plan account to a different 529 plan (savings plan or prepaid tuition plan) without penalty once per calendar year.
You are not limited to your own state's 529 savings plan. States generally allow anyone to participate in their plan. You might choose a different state's plan for a variety of reasons, such as more investment options, a better track record for investment returns, lower fees, or better customer service. However, if you join another state's 529 plan, make sure to find out if you will be giving up any 529 tax benefits offered by your state because some states limit their tax benefits to the in-state 529 plan.
Note: Before investing in a 529 plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses - which contain this and other information about the investment options, underlying investments, and investment company - can be obtained by contacting your financial professional. You should read these materials carefully before investing. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated.
Investment earnings accumulate on a tax-deferred basis, and withdrawals are tax-free as long as they are used for qualified higher-education expenses. For withdrawals not used for qualified higher-education expenses, earnings may be subject to taxation as ordinary income and possibly a 10% federal income tax penalty. The tax implications of a 529 plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. These other state benefits may include financial aid, scholarship funds, and protection from creditors.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. Prepared by Broadridge Advisor Solutions Copyright 2023.
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