If you find yourself intimidated by the ever-rising price of higher education, then a 529 college savings plan might be a key component in saving for a college education. A 529 college savings plan is a tax-advantaged way to save for college and pay for higher education expenses. Unlike some other savings vehicles, a 529 college savings plan may allow you to make sizeable contributions. The funds may generally be used for any qualified college or higher education expense, including tuition, room, board, fees, books, supplies, and equipment. Tax benefits may be subject to certain restrictions.

Money in a 529 college savings plan grows tax deferred. And you may be able to withdraw the money without having to pay federal and state income taxes—depending on the plan and where you live—as long as it’s used to pay for qualified, higher-education expenses.¹ If the money from 529 college savings plans is used for other purposes, the earnings portion of a withdrawal is subject to ordinary federal income tax, an additional 10% federal tax, and any applicable state income taxes. 529 college savings plans may also affect a student's eligibility for financial aid.

Although many details of 529 college savings plans vary by state, they generally come in two forms:

College savings plans – allow you to invest your money in an account to pay for the student’s higher education expenses. Students can use the funds for qualified expenses at accredited institutions in the U.S. and abroad.

Prepaid tuition plans – allow you to lock in tuition rates at eligible colleges or universities with a lump-sum investment or monthly payments. In other words, since you are paying in advance, you are avoiding potential tuition inflation down the road.

529 plans are partially exempt from the gift tax. You can contribute up to $14,000 ($28,000 for married couples) annually² per beneficiary, or up to $70,000 ($140,000 for married couples) over a five-year period, without triggering the gift tax.³

Keep in mind that your gifts are excluded from your estate, so investing in a 529 Plan can be a smart strategy to reduce your estate tax.

Funds may be withdrawn without penalty if the beneficiary receives a scholarship (withdrawals can be made up to the scholarship amount), or in the event of the death or disability of the beneficiary. Ordinary federal and state income taxes would be owed on any investment earnings included in gross income.

¹ A federal 10% penalty may be imposed on the earnings portion of a non-qualified withdrawal in addition to ordinary income tax.

² Annual exemption amounts are subject to revision by the Internal Revenue Service.

³ If the Account Owner utilizes the special five-year lump sum exclusion and dies within five years of the funding date, the portion of the contribution allocable to the years remaining in the five-year period (beginning with the year after the Account Owner's death) would be included in the account owner's estate for Federal estate tax purposes. Clients should consult their tax advisor.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

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