Features and benefits of 529 savings plans
You don’t have to stay local
Most states have a 529 savings plan, including Washington, D.C. But just because you live in a certain state doesn’t mean you’re required to use its 529 savings plan. For instance, CollegeAmerica® is sponsored by the Commonwealth of Virginia, but you can invest in it no matter where you live, as long as it’s in the U.S.
Some states offer additional tax benefits, and each plan features different investment options. So it's a good idea to research which plan fits the needs of your family.
The earnings from your 529 savings plan aren’t subject to federal tax. Not when they’re in the account and not when you withdraw them either, as long as you use them for qualified education expenses. In addition, depending on your state’s tax regulations, you may be able to deduct some or all of your contributions. These tax advantages apply to qualified education expenses. If withdrawals are used for purposes other than qualified education expenses, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax. States take different approaches to the income tax treatment of withdrawals. For example, withdrawals for K-12 expenses may not be exempt from state tax in certain states.
Learn about qualified education expenses
Your child might be focusing on first steps or Boy Scouts right now, rather than selecting a college major. One of the best things about a 529 savings plan is that it can be used to cover a lot when the time comes, including:
- Tuition and related fees for college, trade and vocational schools, community colleges, theological seminaries, international schools, study-abroad programs that run through U.S.-eligible schools and more. Any accredited institution should be able to accept funds from a 529 savings plan. Find a list of accredited choices on FAFSA.
- College room and board.
- Books and supplies, including textbooks, paper, pens or additional supplies required by specific classes (for example, a camera for a photography class).
- Computers and supplies, including laptops, printers, educational software and internet services.
- Certain apprenticeship program expenses.
- Certain student loan expenses (up to a $10,000 lifetime maximum).
- K-12 tuition (up to $10,000 a year per beneficiary on qualified expenses). But withdrawals for K-12 expenses may not be exempt from state tax in certain states.
You can always transfer the account to another family member — as long as the new beneficiary is related to the original beneficiary. So, if your first child gets a scholarship and doesn't need all of the funds in her account, you can change the beneficiary to another child to be used for his education goals. Or you can use the money for yourself to get that next degree. You can even choose to hold on to it for a future grandchild.
There are two participants in a CollegeAmerica and other 529 savings plan: the account owner and the beneficiary. Usually the account owner is the parent or grandparent, and the beneficiary is a minor. The account owner maintains and controls the account, making all the decisions about taking withdrawals and changing beneficiaries, for instance, as well as selecting investments. So you, as the owner, have the final say about how and when the money will be used. Better yet, you can easily change the beneficiary and transfer the funds to an eligible family member if a situation arises.
Another great feature: gifting. Anyone can contribute to your child’s 529 savings plan. Most often, grandparents, aunts, uncles and friends enjoy the opportunity to gift a contribution that goes directly to education savings on birthdays and holidays. And when your child starts that first job — even washing cars or babysitting — he can make contributions, too. Every little bit will help.