College Savings Tips
What to Look for in a 529 Plan
- Performance – Historical performance is not a guarantee of future success but it is an important measure of how well an investment has done over the long term.
- Fees – lower fees mean more of your dollars are invested for growth. However, fees and performance should be evaluated together, since some plans with higher fees have better-performing investments.
- State tax benefits – Many states provide residents with state income tax benefits for investing in a 529 college savings plan.
Earnings on 529 investments accumulate tax-free, and distributions are tax-exempt, as long as they are applied toward eligible education expenses such as tuition and room and board.
529 plans are named for the section of the federal tax code that governs them. They are most often sponsored by individual states and managed by a financial services company. The investments underlying a 529 portfolio typically consist of mutual funds.
Important points about 529 plans:
Distributions must be used for qualified higher education expenses (tuition, fees, room, board, books, equipment and supplies) at any eligible educational institution nationwide including colleges, universities, graduate schools and trade schools. Other qualified expenses include:
- K-12 tuition expenses up to $10,000 per year*
- Repayment of qualified student loans or a maximum lifetime limit of up to $10,000. This includes amounts of repaid principal and interest on any qualified student loan of either a 529 plan designated beneficiary or a sibling of the designated beneficiary.**
- Apprenticeship program registered and certified with the Secretary of Labor under the National Apprenticeship Act. Includes expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in a program.**
- Non-qualified withdrawals are taxable as ordinary income to the extent of earnings and may also be subject to a 10% federal income tax penalty. Such withdrawals may have state income tax implications.
- Account owners maintain complete control of the account and there are no income limitations
- Anyone who has reached the age of majority, as specified by their state of residence, may open an account and anyone may contribute to a beneficiary's account (grandparents, aunts, uncles, friends)
- Account maximums are typically high enough to cover qualified undergraduate, graduate, and professional education expenses
- Account owners may change a beneficiary to another eligible family member or to themselves if the beneficiary does not continue with higher education***
- No penalties are imposed for withdrawals in the amount of scholarships the beneficiary is granted, if certain conditions are met
- Account owners may make two investment strategy changes per year
- Investment returns are not guaranteed, and you could lose money by investing in a 529 plan.