529

Federal tax benefits

529 plans provide income tax breaks. Your contributions are not deductible on your federal tax return. But your investment grows tax-deferred, and distributions to pay for the beneficiary's college costs come out federally tax-free.

State tax benefits

Your own state may offer some tax breaks as well (like an upfront deduction for your contributions or income exemption on withdrawals) in addition to the federal treatment

Control

You decide when withdrawals are taken and for what purpose. Most plans even allow you to reclaim the funds for yourself any time you desire, no questions asked. (However, the earnings portion of the "non-qualified" withdrawal will be subject to income tax and an additional 10% penalty tax).

Flexible

If you want to move your investment around you may change to a different option in a 529 savings program every year (program permitting) or you may rollover your account to a different state's program provided no such rollover for your beneficiary has occurred in the prior 12 months.

Substantial deposits allowed

Everyone is eligible to take advantage of a 529 plan, and the amounts you can put in are substantial (over $300,000 per beneficiary in many state plans). Generally, there are no income limitations or age restrictions. Thinking about going back to college or graduate school in the future

 

Tax Benefits

As long as the 529 plan satisfies a few basic requirements, the federal tax law provides special tax benefits to you, the plan participant. .

Some states (but not all) offer tax incentives to investors as well. Research your state's

 

Penalty of not using 529 plan

Only earnings are subject to a withdrawal penalty

Federal law imposes a 10% penalty on earnings for non-qualified distributions beginning in 2002. The penalty is not assessed on principal. (Distributions are allocated between principal and earnings on a pro-rata basis.) An exception to the penalty can be claimed if you terminate the account because the beneficiary has died or is disabled, or if you withdraw funds not needed for college because the beneficiary has received a scholarship.

How to minimize the penalty

You can change the beneficiary to another qualifying family member at any time in order to keep the account going and avoid (or at least delay) taking non-qualified withdrawals when the original beneficiary doesn't need those funds.  Example - if you have 2 kids.  You can change the name to other kid

 

 






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