OneShare Investments

529 Plan Advantages -- Benefits of the 529 college savings plan

1) Federal tax benefits

Here's the deal: While contributions to 529 plans are not tax deductible, earnings on the account grow on a tax-deferred basis. Basically, this means no income tax on the money your plan earns each year. This is different than mutual funds and other investments, which is why 529 plans are so attractive to parents looking for a college savings option. When the time comes to tap the account, withdrawals will be federal tax-free as long as the money goes towards qualified higher education expenses (QHEE), including tuition, books, fees, supplies, and equipment. Room and board can also fall under QHEE, but there are stipulations; your Parent Investment Specialist will have the full details.

2) State tax benefits

Some states offer additional tax breaks for residents when they invest in a 529 plan sponsored by their home state. Talk to your Parent Investment Specialist to find out if your state offers tax advantages.

3) Parental control

As parents ourselves, we think this one is a biggie. With a 529 plan, you control the cash, which means that even though you have named your child as the beneficiary, you are in charge of deposits and withdrawals. So, if your child chooses a Harley over Harvard, you won't have to worry—at least not about your 529 plan—because you can change the beneficiary name on the account at any time. This degree of parental control is not available with other college saving programs, including Coverdell Education Savings Accounts (ESA), Uniform Gift to Minors Accounts (UGMA), and Uniform Transfer to Minors Accounts (UTMA).

4) Flexible contribution amounts

A 529 plan allows for generous contributions which is a definite bonus for higher-income families. However, some plans start as low as $50 a month when you enroll in an automatic investing plan, which makes it affordable for families who are just starting. Call your Parent Investment Specialist to learn more.

5) Investment choice

Within a 529 plan, you can choose from a variety of mutual funds that invest in a diverse array of stocks and bonds from many well known fund families. Your account will go up or down in value based on the performance of the particular option you select. Or, you can choose an age-based portfolio with an investment strategy that changes depending on how old your child is. When your child is young and there's more time to ride out the ups and downs in the market, these portfolios invest more aggressively for potential growth. They get more conservative as time goes on, in order to protect your investment earnings. Many people like this approach because it allows them to “set it and forget it” rather than worrying about how to manage their investment.

6) Gift and estate-planning benefits

If you're the account owner on a 529 plan, you can make a tax-free gift of up to $65,000 per beneficiary in a given year, or $130,000 if you're married and filing jointly. The catch is that you're electing to use five years of the annual gift tax exclusion (currently $13,000) all in one year, so you can't gift any additional amount to that beneficiary any time during that five-year period without incurring tax implications. Grandparents can also help fund a child's education and receive gift and estate tax benefits utilizing 529 Plans. 529 plans have a slew of other gift and estate-planning benefits, but they get a little confusing, so ask your Parent Investment Specialist to give you a detailed summary.