Plan to have children? Already have kids? Maybe want to help out a family member? Or is a return to school in your future plans?
If you answered ‘yes’ to any of those scenarios, then a 529 plan could be right for you.
In a nutshell, a 529 is an education savings plan with a number of state tax advantages. It's intended to help encourage you to save for education costs. First, you contribute to a 529 plan with post-tax money. Then, you select an investment portfolio that your plan offers. Over time, that money will grow tax-free and can be withdrawn tax-free to cover various qualified education expenses (more below on what qualifies to be covered).
529 plans are set up by states, state agencies (like a state treasurer or state education trust), or education institutions (like vocational, community and state colleges).
States, state agencies, or and educational institutions sponsor 529 plans, which are authorized by Section 529 of the Internal Revenue Code. The website SavingforCollege.com, an independent resource for parents and professionals to understand 529 plans, has databases of eligible institutions, agencies and state plans.
No – you can invest in an out-of-state 529 plan.
Say you don’t like your state plan’s investment options, take issue with the fees, or your state is one of the more than a dozen states that does not offer an income tax break. By all means, you are entitled to shop around. Find a 529 plan in another state that suits your needs.
By that we mean school tuition, fees, room and board, books, other supplies and certain equipment. A beneficiary who is a member of the family – say a spouse, child, sibling, in-law, parent, aunt, uncle, niece, nephew or first cousin – can put 529 funds toward any of those expenses.
Yes, but the limit to how much you can contribute is set by each state. For example, if you were to choose one of Oregon’s plans (they have two), you’d have an annual contribution limit of $310,000. If you sign up for the Pennsylvania 529 Investment Plan, you could contribute just north of $500,000 a year.
Ah, now here's where things get a little interesting.
In short, the answer depends on where you live and which state plan you have. Thirty-four states, plus the District of Columbia, offer a state income tax deduction or tax credit. The catch is you need to be a resident of the state that sponsors your 529 plan.
Stay with us here.
However, there are seven states that offer a state income tax benefit to residents who invest in an out-of-state 529 plan (Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana and Pennsylvania). They are referred to as “tax parity states.” How much you can deduct varies by state.
Finally, there are 10 states that don’t offer a tax deduction for residents who are saving in its 529 plans (California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota, New Hampshire, New Jersey, North Carolina and Tennessee).
If you’re a resident of Indiana, Utah or Vermont and contribute to one of their plans, you can receive a state income tax credit (as opposed to a tax deduction).
Yes, a 529 plan is considered a gift. If you’re the beneficiary, people are literally putting money into an account under your name. The hope is that money gives a return on the investment. And the hope is that one day the money in that 529 plan will lighten your financial load when it comes to education costs. What a gift!
And yes, a gift tax may apply to contributions made to a 529 plan.
There is a little thing called the ‘annual gift tax exclusion.’ This refers to an amount a person can give to others tax free each year. Let’s say you contribute to a family member’s 529 plan. You may not have to pay taxes on a portion of that contribution.
For 2019, the annual gift tax exclusion is $15,000. For example, in a two-parent household, each parent can contribute up to $15,000 tax-free to their child’s 529 plan each year.
Of course, there’s a whole lot more to learn about 529 plans (have you ever heard of the Generation-Skipping Transfer tax or superfunding?). But those are best discussed with a professional financial advisor. We think we covered the basics here. We hope this helped.
This article is for informational purposes only and is not a substitute for individualized professional advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA is not providing any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.
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