Saving for Higher Education: An Overview of a 529 Plan

What is a 529 plan?

A 529 plan is an advantaged savings vehicle for higher education expenses for a designated beneficiary. Distributions are tax-free, beneficiaries can be changed, and setting up a plan is simple. Qualified education expenses include school tuition, and any materials or equipment needed for education including textbooks, computer technology, and related equipment. 

What are the tax benefits of a 529 plan? 

Contributions to a 529 plan are tax-deferred, meaning that investment earnings in the plan are not subject to income tax. Withdrawals from the plan are tax-exempt if the funds are used for qualified education expenses. Contributions are subject to annual gift taxes, however the annual limit on gifts can be circumvented somewhat through a process called superfunding. This strategy allows a lump sum contribution of up to five times the annual gift tax exemption by treating the contribution as if it were spread over a five-year period. Superfunding allows contributions of up to $95,000 ($190,000 if married, giving jointly) in a single year without owing any gift taxes.

How are the funds used or distributed?

Funds from a 529 plan can be used to fund any amount of college tuition and up to $10,000 of K-12 tuition. Additionally, the beneficiary of a 529 plan can be changed at any time to another family member, including siblings and children of the original beneficiary. Investments within the plan can be changed twice a year with no tax consequences.

How can someone set up a 529 plan?

A 529 plan can be set up at any time, even before a child is born, and there are many different providers. Most providers offer multiple different plan options, with programs customized by time horizon and risk appetite.

Are there disadvantages to a 529 plan?

One of the disadvantages of a 529 plan is that most providers limit investment to a pre-set list of offerings. One cannot invest in individual stocks or customize the portfolio to the same degree as in a traditional brokerage account. Additionally, 529 plans can only be rebalanced twice each calendar year. 

A 529 plan is an advantaged savings vehicle for higher education expenses - qualified distributions are tax-free, beneficiaries can be changed, and setting up a plan is simple.