What is a 529 plan?
A 529 College Savings Plan is a tax-advantaged account you can use to save for qualified education expenses. The money you contribute to the plan is invested, typically in mutual funds, although some plans may also offer individual stocks and bonds.
When it's time for your child to go to college, you can use the money from your 529 plan to pay for:
- Tuition and fees
- Room and board
- Computer technology and equipment
When 529 plans were first created, they were designed to save for college education expenses only. However, parents can withdraw up to $10,000 per year3 to cover tuition costs for elementary or secondary school.
529 plan benefits
The main benefit of using a 529 plan is its tax-advantaged status. The money you save grows tax-free, as long as you use it to pay for qualified education expenses and your child attends an eligible education institution. (For college, that means any school that's eligible to participate in federal student aid programs.)
You pay no tax on any earnings from your 529 plan investments when you meet those conditions. Additionally, more than 30 states4 offer either a tax deduction or credit for 529 contributions. Credits reduce your tax liability, while deductions lower your taxable income. Either way, this could mean paying less in state taxes. However, there's no federal tax break for 529 contributions.
Another benefit is that 529 plans come with generous lifetime contribution limits. Depending on the plan you choose (options and limits vary by state), you may be able to contribute until all account balances for a particular beneficiary reach up to $529,000.5 However, your contributions for the year can't exceed the annual gift tax exclusion limit. For 2020, the limit is $15,000,6 which means you can contribute up to that amount per child.
There's also one important tax rule to know about withdrawals: any earnings included in a 529 plan that isn't used for qualified education expenses are subject to a 10% tax penalty, plus regular income tax. Your original contributions wouldn't be taxed since they are made with after-tax dollars.
Opening a 529 college savings account
Opening a 529 account isn't that difficult. Once you find the plan you want to save in, you'll enroll yourself as the owner and your child as the beneficiary, then begin making contributions.
Every state offers at least one 529 savings plan. The great thing is, you can use any state's plan to save for college, regardless of where you live. As you're comparing plans, consider:
- Whether your state's plan offers a tax break
- Lifetime contribution limits
- The plan's investment choices
- Plan fees
Choosing a 529 plan is a big decision, and it's important to make sure you're picking the right one for your college savings goals. If you need help making sense of different plans available or opening one, Synovus can help. Having a trusted expert to help guide you can make the entire process much easier. Give us a call at 1-888-SYNOVUS (1-888-796-6887) to start the college savings conversation.7