The Complete Guide to 17 Benefits of 529 Plan


As the cost of higher education, each year continues to grow 529 college savings plans become a great solution for many parents and grandparents when it comes to saving for their kids’ and grandkids’ college education. While most people are catching on to the appeal of 529 plans, which offer tax-advantaged investments to pay for qualified education expenses, many people don’t realize how much flexibility and advantages a 529 plan gives them.

Many still overlook a number of benefits these accounts provide. So, here are the top reasons a 529 college savings account is increasingly worthwhile.

1. The most known benefits of 529 plan – a tax break

The decision of using 529 college savings plan to fund college education costs will provide you a variety of state and federal tax benefits.

529 plan withdrawal rules and tax benefits

529 plan provides a great state income tax deduction, but it is not the greatest benefit of using a 529 plan to fund college education costs. The biggest benefit of the 529 plan lies in raising money without taxes tax-deferred growth and tax-free withdrawals it can provide. 529 plans can be invested in a wide range of investment options. You can invest money in mutual funds and the stock market, it all depends on you.  According to IRS, the earnings generated in a 529 plan are not subject to federal income taxes. Because of this investment will grow without being depleted annually by taxes. The distributions from the 529 plan are not subject to federal or state income taxes when the money is used for qualified education expenses.

The withdrawals can qualify for the special tax treatment if the money is used for higher education expenses, including fees, tuition costs, books, some room and board expenses, and other required expenses. This allows you to take full advantage of any investment gains by putting them directly towards college education costs and not having them reduced by income taxes.

If you don’t use money from 529 plan for qualified higher education expenses, you will not lose it. But you will lose some of the preferential tax benefits. In this case, the earnings portion of your withdrawals will not be tax-free. Non-qualified withdrawals will be subject to federal income tax at your ordinary income tax rate. So, you will be assessed an additional 10% withdrawal penalty.

2.Invest in a state-sponsored plan

Choose smart – investing in a state-sponsored plan can bring you additional tax advantages

The plan is different from country to country, so as we mentioned before, it is important to research and compare plans to find the one that’s right for you. Why are plans so different? The reason is that almost every state sponsors its own 529 plan to pay costs at accredited schools in any state. Also, many offer deductions on state income tax to residents contributing to their home state’s plan.

The best practice is to consider this as an investment plan and you need to evaluate the particular 529 plans like you would any other investment.  Check investment plan, plan performance and underlying fees and expenses before you invest.

3. You can choose between different states

You can choose any state’s 529 -You are not limited to your home state’s plan! So you can research and find the one which suits you the most. However, you may only be eligible for a tax deduction if you choose the plan offered in your state.

4. You are not limited to a one account

You are free to have multiple accounts in the multiple states. There is no limit on the number of 529 plans you can hold at one time. That means even if you’ve already picked a plan in your state, it’s not too late to find a plan that suits you better.

5.Use a 529 plan to fund your own continuing education

Anyone who resides in the United States and have a Social Security number, who is aged 18 or older, can open and fund a 529 plan. Because of that 529 plan represent a great way to start saving for further training for your current career or a new one you are considering

6.You can change a beneficiary

Yes, you can change a beneficiary. And generally, if you change a beneficiary to a new beneficiary who is a family member of the old beneficiary, you can do this without any income or gift tax issues!

7. Choose the investments that work for you

These plans offer a variety of investments, including mutual funds, exchange-traded funds and fund of fund portfolios. Most plans offer risk-based or age-based options, similar to target-date funds in a 40 (k).

8. 529 plan assets won’t disqualify your child from financial aid

People by mistake often think that 529 plan accounts will have a negative impact on financial aid eligibility only because a 529 plan account is earmarked for higher education. Don’t listen to this or any other opinions. The best is that you research and collect facts from confidential sources yourself. And when you get all the necessary information, compare the advantages and disadvantages of 529 plans and make a decision. It is very important to have precise and proven facts because this decision will greatly affect you or on your children’s lives (or someone else you labeled as a beneficiary)

9.The donor stays in control of the account

The named beneficiary has no legal rights to the funds, which allows you to control that the money will be used for its intended purpose. Also, as an owner of the 529 account, you can raise funds at any time for any reason. But be aware that the earnings portion of non-qualified withdrawals will incur income tax and an additional 10% penalty tax.

10. Anyone can contribute to a 529 plan

Anyone can make a contribution. So tell the family and friends that they can help you in this way. It’s a great gift!

11. Generous limits

Although many states-set limits on how much you can contribute in total to a 529 countries set boundaries, however, that line is high. In many cases, you can make contributions until the balance reaches close to $400,000. These contributions also qualify for a gift-tax exclusion. One more benefits of 529 plan is that are no income restrictions as there are with other types of savings accounts.

12. No genius penalty

If your child receives a partial scholarship, you can withdraw, without penalty, the amount equal to the scholarship. However, you may owe taxes on it.

13. The accounts won’t expire, even if you do

With the 529 plan, you don’t need to worry about the expiration date, It’s not a “use it or lose it” account! One of the biggest benefits of the 529 savings plans is that owners can change their beneficiaries at their own discretion and without limitation. So if you or your child doesn’t use all or any of the funds in the 529, then the account can be put in the name of a sibling or other family member. Or you can withdraw money and use it for other purposes.

14. You can repurpose some or all of the 529 plan funds

For example, if your child gets a scholarship, you can repurpose some or all of the 529 plan funds. Also, you can withdraw an amount equal to the scholarship from the 529 plan. You can do that without paying the 10% additional federal tax normally required for withdrawals that are not going to higher-education costs. Instead, you pay ordinary income taxes. And you can use that money to meet other financial goals, such as saving for retirement. Or you can just change the name the name of the account’s beneficiary to someone in that person’s family — for example, one of your other children or even a first cousin.

15. You can transfer wealth with a 529 plan

Contributing to a 529 plan also can help grandparents or others reduce the size of their taxable estates. Also, it is possible to accelerate your gifting timetable by contributing five years’ worth of 529 plan contributions per beneficiary. Contributions can be as much as $140,000 for couples or $70,000 for individuals — into one year by using the annual gift exemption.  But be aware that within the five-year period, you won’t be able to make additional gifts to the beneficiary.

16. Yes, undergraduate schools count

529 plans can be used for undergraduate or graduate school in the U.S. and some accredited schools abroad. You can use them to pay for room and board, fees, books, computers or other supplies.

17. Long-term- Benefits of 529 plan

Any benefit provided by the 529 plan like income tax-deferred and tax-free benefits are most valuable when you have a long time horizon to invest and allow your contributions to grow. So it is important to set up a 529 plan for your child or beneficiary as early as possible to take full advantage of the growth and tax opportunities. If you set up 529 plan just a few years before the college expenses are incurred provides much more limited tax savings than setting up an account 18 years earlier and allowing the account to generate a tremendous amount of tax-free growth.