What is a College Savings (529) Plan?

You may have heard of 529 Plans or College Savings plans. They’re a good way to put money aside for future college expenses for children, nieces & nephews, spouses, or other family members and friends. But there is quite a bit of confusion regarding the operation of a 529 plan and how it’s handled from a tax standpoint. A few key points:

  1. Funds contributed to a 529 plan are NOT TAX DEDUCTIBLE when they’re contributed. This is perhaps the largest misconception regarding 529 plans.
  2. Funds from a 529 plan can grow free from federal (and generally state) tax.
  3. When the funds are withdrawn, so long as they’re used for qualified education expenses, they’re also tax free.
  4. Computers and other educationally related technology items are considered qualified education expenses.
  5. You can change the beneficiary (the intended recipient) of the 529 Plan. So if one child’s educational aspirations change, you can shift the plan to another beneficiary.
  6. You can also combine 529 Plan funds.
  7. There are no specific contribution limits to 529 Plans except that they cannot exceed the cost of the educational expenses. Note that if the contribution exceeds the current gift limits that there may be other ramifications.

If you’d like more information regarding 529 plans and how to effectively use them, contact our office at (480) 888-7111. You’ll also find additional information on the IRS website.