529 Plan Rules: What You Need to Know – NerdWallet

The price of higher education does n’t come cheap, which means it ‘s a thoroughly estimate to start saving while your pull the leg of is learning their ABCs — not while they ‘re studying for their SATs. For most people, the choice of college savings fomite is easy : 529 plans offer some great incentives for saving. But they besides come with some complicated rules.

What is a 529 plan?

A 529 plan provides tax-exempt investment growth and withdrawals for stipulate department of education expenses. Parents who start saving in a 529 explanation when their children are young can take advantage of those tax savings, equally well as compounded returns and — in some states — a tax tax write-off on contributions.

529 plan rules

Because of those tax advantages, 529 plans do have a few rules, including guidelines around what qualifies as an department of education expense. here ’ s what you need to know about these plans.

1. 529 plans are state-sponsored, but you can pick a plan from any state

Most states offer at least one 529 plan. You don ’ t have to invest in your own state ’ s plan ; though many states offer residents a state tax subtraction for doing indeed, there is no federal tax deduction for 529 contributions. If your state doesn ’ thymine offer any tax benefits ( check our list of all state plans ), shop around to find the best design for you. The state that sponsors your design besides doesn ’ t have any role in where your child can go to school ; students can use the money to attend a qualify school in any state. The exception here is a specific kind of 529 plan called a prepay plan, which, as the name implies, allows you to prepay tutelage at an in-state, public college, locking in the monetary value in today ’ sulfur dollars and at current tuition rates. These plans make sense merely if you ’ re sure your child will attend an in-state, populace educate, and only a few states presently offer prepaid 529 plans.

2. The account holder maintains ownership of the funds

Unlike other college savings vehicles such as custodial accounts, 529 plans allow the funds to remain under the report owner ’ s manipulate, meaning you can withdraw the funds at any fourth dimension ( though taxes and penalties may apply ; more on this under ). The beneficiary does not have see over the funds in the account, evening when they reach the age of majority, which is between the ages of 18 and 21, depending on the state. ad

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3. There aren’t set contribution limits

The IRS says “ contributions can not exceed the come necessary to provide for the dependent education expenses of the beneficiary. ” So, unlike other tax-advantaged accounts — such as Roth and traditional IRAs — 529 plans do not have specific contribution limits set forth by the IRS. Most states do set limits between $ 235,000 and $ 529,000. however, contributions may trigger endow tax consequences if you earmark more than the gift tax excommunication ( $ 16,000 for 2022 ) for any one benefactive role in a tax year. The huge majority of people do not need to worry about this since they are improbable to need to contribute that much per class to meet their savings goals.

4. Qualified distribution rules are strict

A 529 is specifically for stipulate higher education expenses, though that category extends beyond tutelage ; it besides includes fees, room and board, textbooks, computers and “ peripheral equipment ” ( like a printer ). A 529 plan can besides be used to pay for private or religious elementary, middle and gamey school tuition. Withdrawals made for purposes outside the rules will hurt : Earnings withdraw for non-qualified expenses are subject to a 10 % penalty and average income taxes. There is no penalty on the principal. There are a few exceptions : If the beneficiary receives a scholarship, you can withdraw money adequate to the amount awarded ; the earnings will still be subject to taxes but there will be no extra punishment. Parents can besides change the benefactive role on the report at any time, so if, for exemplar, your foremost child decides to take a different way, you can change the account beneficiary indeed that the funds will go toward paying for a younger sibling ’ south education alternatively. » Planning for the future ? Learn the difference between wills and trusts

The bottom line

For many families, 529 plans will be the obvious option for college savings. Most plans offer age-based investment options that will automatically rebalance, taking more hazard as your child is young and less as they approach college age. You can open a 529 design directly through your state ’ south design website. » Find your state ‘s 529 plan : 529 Plans by State

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