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    What is a 529 Plan?

    By Will Geiger

    Will Geiger is the co-founder of Scholarships360 and has a decade of experience in college admissions and financial aid. He is a former Senior Assistant Director of Admissions at Kenyon College where he personally reviewed 10,000 admissions applications and essays. Will also managed the Kenyon College merit scholarship program and served on the financial aid appeals committee. He has also worked as an Associate Director of College Counseling at a high school in New Haven, Connecticut. Will earned his master’s in education from the University of Pennsylvania and received his undergraduate degree in history from Wake Forest University.

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    Reviewed by Annie Trout

    Annie has spent the past 18+ years educating students about college admissions opportunities and coaching them through building a financial aid package. She has worked in college access and college admissions for the Tennessee Higher Education Commission/Tennessee Student Assistance Corporation, Middle Tennessee State University, and Austin Peay State University.

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    Edited by Maria Geiger

    Maria Geiger is Director of Content at Scholarships360. She is a former online educational technology instructor and adjunct writing instructor. In addition to education reform, Maria’s interests include viewpoint diversity, blended/flipped learning, digital communication, and integrating media/web tools into the curriculum to better facilitate student engagement. Maria earned both a B.A. and an M.A. in English Literature from Monmouth University, an M. Ed. in Education from Monmouth University, and a Virtual Online Teaching Certificate (VOLT) from the University of Pennsylvania.

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    Updated: October 19th, 2023
    What is a 529 Plan?

    A 529 plan is a savings plan that helps students and parents save for educational expenses. The big benefit of the 529 plan is that there are tax benefits for contributions, and withdrawals are not subject to federal income tax or (usually) state income taxes.

    So, your 529 plan grows with these benefits and the earned interest is tax-free! The longer that your money is in a 529 plan, the more opportunity it has to grow. This means that you will have more money to pay for education! 529 plans are sponsored by individual states, state agencies, and educational institutions.

    Related: How much to save for college

    What can a 529 plan be used for?

    529 plans pay for “qualified educational expenses,” including tuition, room, board, mandatory fees, and even computers or software (if required). Qualified expenses occur in the context of college, elementary, or secondary schools. Vocational and trade schools are also included, as well as costs related to homeschooling. Additionally, thanks to the SECURE Act, 529 plans now pay for student loans.

    Are there different types of 529 plans?

    There are two types of 529 plans:

    1. Prepaid Tuition Plans
    2. Educational Savings Plans

    Let’s get into the differences between these two types:

    Prepaid Tuition Plans vs. Educational Savings Plans

    Prepaid Tuition Plans

    The first type of 529 plan, the Prepaid Tuition Plan, allows students and families to purchase “units or credits” at specific colleges. This means that you are locking in tuition and other fees at their current rate. This matters because even if tuition climbs up (which it generally does), you will only pay the current price. Most of the time, this Prepaid Tuition Plan is for public, in-state colleges and universities. Therefore, it is only available to residents of a particular state. Note that this option does not allow you to pay for room and board, or pay for elementary or secondary school tuition. The biggest risk of this option is if you don’t wind up attending one of the participating institutions. This can result in a situation where your Prepaid Tuition Plan does not cover the cost of attendance.

    Educational Savings Plan

    An Educational Savings Plan is a more traditional investment account for tuition, mandatory fees, and room and board. To save with the Educational Savings Plan, an individual can choose from a number of investment options from banks and other investment companies. The risk/reward of the Educational Savings Plan is that you invest in assets such as mutual funds or exchange-traded funds that can go up or down.

    Also read: Which 529 plan assets are reported on the FAFSA?

    What fees will I pay if I invest in a 529 plan? 

    Prepaid Tuition Plans

    Prepaid tuition plans may charge an enrollment fee as well as an administrative fee throughout the life of the plan. 

    Education Savings Plan

    Education savings plans may charge an enrollment fee, annual account maintenance fee, ongoing program management fees and ongoing asset management fees. Investors who purchase an education savings plan from a broker are typically hit with additional fees. 

    Do all states offer a 529 plan option?

    49 states offer a 529 plan option! The only state that does not offer a 529 plan is Wyoming. Each state typically offers its own 529 plan with different features, investment options and tax benefits. Below is a list of all of the offered 529 plans by state along with their state tax benefits and if they require state residency. 

    State 529 Plan Name State tax benefits Requires state residency
    Alabama CollegeCounts 529 Deduct up to $5,000 for single filers or $10,000 when filing jointly No
    Alaska Alaska 529 Alaska does not have state income tax No
    Arizona AZ 529 Deduct up to $2,000 for single filers or $4,000 when filing jointly No
    Arkansas Arkansas Brighter Future 529 Deduct up to $5,000 for single filers or up to $10,000 when filing jointly No
    California ScholarShare 529 Do not have to pay state tax on your account’s earnings No
    Colorado CollegeInvest 529 Deduct up to $20,000 for single filers or up to $30,000 when filing jointly No
    Connecticut  Connecticut Higher Education Trust 529 Deduct up to $5,000 for single filers or up to $10,000 when filing jointly No
    Delaware DE529 Do not have to pay state tax on your account’s earnings No
    District of Columbia DC College Savings Plan Deduct up to $4,000 for single filers or up to $8,000 when filing jointly No
    Florida Florida 529 Savings Plan Florida does not have state income tax Yes
    Georgia Path2College 529 Plan Deduct up to $4,000 for single filers or up to $8,000 when filing jointly No
    Hawaii HI529 Do not have to pay state tax on your account’s earnings No
    Idaho IDeal Savings Plan Deduct up to $6,000 for single filers or up to $12,000 when filing jointly No
    Illinois Bright Start 529 Plan Deduct up to $10,000 for single filers or up to $20,000 when filing jointly No
    Indiana CollegeChoice 529 Indiana taxpayers can claim a state tax credit equal to 20% of contributions, up to $1,000 per year No
    Iowa College Savings Iowa Deduct up to $3,522 of their 2022 contributions per beneficiary No
    Kansas Learning Quest 529 Savings Plan Deduct up to $3,000 for single filers or up to $6,000 when filing jointly No
    Kentucky KY Saves 529 Do not have to pay state tax on your account’s earning No
    Louisiana  START Saving Deduct up to $2,400 for single filers or up to $4,800 when filing jointly Yes
    Maine NextGen 529 Do not have to pay state tax on your account’s earnings No
    Maryland Maryland 529 Deduct up to $2,500 for single filers or up to $4,800 when filing jointly No
    Massachusetts U.Fund 529 Deduct up to $1,000 for single filers and up to $2,000 when filing jointly No
    Michigan Michigan Education Savings Program (MESP) Deduct up to $5,000 for single filers and up to $10,000 when filing jointly No
    Minnesota MNSaves Minnesota taxpayers can choose between a deduction of up to $1,500 for single filers or $3,000 for joint filers OR claim a credit equal to 50% of the annual contributions for a maximum of either $250 or $500 No
    Mississippi Mississippi Affordable College Savings (MACS)  Deduct up to $10,000 for single filers and up to $20,000 when filing jointly No
    Missouri MOST 529 Deduct up to $8,000 for single filers and up to $16,000 when filing jointly No
    Montana Achieve Montana Deduct up to $3,000 for single filers and up to $6,000 when filing jointly No
    Nebraska Nebraska Educational Savings Plan Trust (NEST) 529 Deduct up to $5,000 for single filers and up to $10,000 when filing jointly No
    Nevada Vanguard 529 College Savings Plan

    USAA 529 Education Savings Plan

    SSGA Upromise 529 Plan

    Nevada does not have state income tax No
    New Hampshire UNIQUE College Investing Plan New Hampshire does not have state income tax No
    New Jersey NJ Best Deduct up to $10,000 for single filers and up to $20,000 when filing jointly Yes
    New Mexico The Education Plan New Mexico taxpayers can deduct 100% of their contributions from their state taxable income No
    New York New York’s 529 Deduct up to $5,000 for single filers and up to $10,000 when filing jointly No
    North Carolina NC 529 Do not have to pay state tax on your account’s earnings No
    North Dakota College SAVE Deduct up to $5,000 for single filers and up to $10,000 when filing jointly No
    Ohio Ohio’s College Advantage 529 Ohio taxpayers can claim a $4,000 deduction per child, per year on their contributions No
    Oklahoma Oklahoma 529 College Savings Plan Deduct up to $10,000 for single filers and up to $20,000 when filing jointly No
    Oregon Oregon College Savings Plan Oregon taxpayers can earn a $150 tax credit for single filers or a $300 credit for joint filers No
    Pennsylvania PA 529 Deduct up to $16,000 for single filers and up to $32,000 when filing jointly No
    Rhode Island CollegeBound Saver Deduct up to $500 for single filers and up to $1,000 when filing jointly No
    South Carolina Future Scholar South Carolina taxpayers can deduct up to 100% of their 529 contributions from their state income tax Yes
    South Dakota CollegeAccess 529 South Dakota does not have state income tax Yes
    Tennessee TNStars Tennessee does not have state income tax No
    Texas Texas College Savings Texas does not have state income tax No
    Utah My529 Utah account owners can claim a $105 credit on a maximum contribution of $2,130 and joint tax filers can get a $210 credit on up to $4,260 in contributions No
    Vermont Vermont Higher Education Investment Plan (VHEIP) Vermont taxpayers can claim a tax credit of 10% of the first $2,500 in contributions per beneficiary No
    Virginia Virginia529 Deduct up to $4,000 while account owners who are 70 or older can deduct 100% of their contributions No
    Washington DreamAhead Washington does not have state income tax No
    West Virginia SMART529 West Virginia taxpayers can deduct 100% of their contributions Yes
    Wisconsin Edvest Deduct up to $1,780 for single filers and $3,650 when filing jointly No
    Wyoming Wyoming does not offer a 529 plan

    Related: How to choose the best 529 Plan for you

    Can a 529 plan impact need-based financial aid?

    Yes, a 529 plan can impact need-based financial aid for students. However, this will vary from college to college. It can also vary based on the amount of money in the account and the owner of the account. For more information on how to maximize your 529 savings without reducing your financial aid, check out our article.

    See also: How much is the 529 plan deduction worth?

    529 plan tax benefits

    You might be wondering what exact tax benefits the 529 plan offers. There are two levels of tax breaks – federal, and in some cases, state breaks.

    For federal tax breaks, your capital gains and withdrawals will not be taxed. That means that you won’t pay any federal tax on the interest that grows in the account, as long as you spend it on approved educational expenses. You’ll still pay taxes on the initial income that you place into the account, but the growth, which would usually face substantial taxes, goes untaxed.

    State tax breaks vary on a case-by-case basis. Some states offer a tax deduction for 529 plan contributions. That means you’ll be able to deduct your contributions from your taxes, potentially earning a refund or a reduced balance at the end of the year.

    Related: 529 plan rules

    What happens if my child doesn’t attend college?

    If the account beneficiary doesn’t end up attending an approved educational institution, you can change the beneficiary to another family member without incurring any penalty. You also have the option to withdraw your funds and use them for whatever you’d like. But keep in mind, if you do this, you’ll have to pay taxes on all of the capital gains, and pay a 10% charge on top of that.

    When should I start a 529 plan?

    It’s never too early to start a 529 plan! If you’ve got even a small bit of income to put aside monthly, consider starting a 529 plan for your child. Remember, the longer the money stays in the account, the more it grows. So, if you start saving early, you’ll thank yourself later. If plans change and your child doesn’t end up attending college, you can transfer the account to another name, or withdraw it for other expenses, with a penalty.

    Key Takeaways

    Key Takeaways

    • A 529 plan is a savings plan that help students and parents save for educational expenses with tax benefits and 529 plans are not subject to federal income tax or typically state income tax
    • There are two types of 529 plans: prepaid tuition plans and educational savings plans
    • Prepaid tuition plans allow students and families to purchase credits at specific colleges in order to lock in the current tuition rate
    • Educational savings plans are a more traditional investment account for tuition, mandatory fees and room and board expenses
    • 49 states offer a 529 plan option (Wyoming does not)
    Key Takeaways

    Frequently asked questions about 529 Plans

    What happens if I move to a different state after opening a 529 plan?

    You can generally maintain your 529 plan even if you move to a different state. However, it is important to review the rules and potential tax implications of your plan.

    Can I use a 529 plan to pay for non-college expenses?

    While 529 plans are primarily designed for education expenses, they can also be used for some apprenticeship programs and up to $10,000 per year beneficiary for K-12 tuition at eligible schools.

    Can I have multiple 529 plans?

    Yes, you can have multiple 529 plans and there is no limit to the number of plans you can open. However, you should consider the impact on the overall financial aid eligibility of the beneficiary.

    What if the beneficiary does not use all of the funds in the 529 plan?

    You can change the beneficiary to another eligible family member, save the funds for future education expenses, or withdraw the money which will be subject to taxes and penalties.

    Can I use a 529 plan for graduate school or professional studies?

    Yes! 529 plans can be used to pay for qualified higher education expenses, including graduate school, medical school, law school and other professional programs.

    What if a beneficiary decides not to attend college right after high school?

    529 plans have no expiration date, so the funds can remain in the account until the beneficiary decides to use them for qualified education expenses. There is no rush to use the funds right after high school if more time is needed. 

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