A 529 plan, also called a Qualified Tuition Program, is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary. The plan is sponsored by states, state agencies, or educational institutions and is authorized by Section 529 of the Internal Revenue Code. Here are some key features of a 529 account:
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Tax benefits: Contributions to 529 college savings plans are made with after-tax dollars, but the investment grows tax-free, and withdrawals are tax-free when used for qualified education expenses.
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Investment options: Each 529 plan offers investment portfolios tailored to the account owner’s risk tolerance and time horizon. It’s important to consider your investment objectives and compare your options before you invest.
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Qualified expenses: Funds in a 529 account can be used for qualified education expenses, including tuition, books, and other expenses at most accredited two- and four-year colleges and universities, vocational-technical schools, and eligible foreign institutions.
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Flexibility: Unlike other college savings vehicles such as custodial accounts, 529 plans allow the funds to remain under the account owner’s control, meaning you can withdraw the money at any time (though taxes and penalties may apply if the funds are not used for qualified education expenses) .
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State tax advantages: While most plans allow investors from out of state, there can be significant state tax advantages and other benefits, such as matching grant and scholarship opportunities, protection from creditors, and exemption from state financial aid calculations for investors who invest in 529 plans in their state of residence.
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ABLE accounts: In 2014, Congress passed the Achieving a Better Life Experience (ABLE) Act, laying the groundwork for ABLE accounts. ABLE, or 529A, accounts are similar to 529 plans, except for the purpose of saving for a disabled beneficiarys special needs.
It's important to note that while each educational institution may treat assets held in a 529 account differently, investing in a 529 plan will generally impact a student’s eligibility to receive need-based financial aid for college.
