A 529 plan is a tax-free account established for the express purpose of paying the expenses of higher education for a child, a grandchild, or another family member.
Money invested in a 529 plan grows tax-free, and the account can be used to pay for “qualified” higher education expenses, including books, tuition, fees, and supplies. What counts as “higher education”? College, graduate school, or an approved vocational school all qualify.
You can contribute up to $13,000 per year to each beneficiary’s 529 plan without paying gift tax or triggering gift tax reporting requirements. If you’re married, you and your spouse can contribute up to $26,000 per year per beneficiary.
There are some significant drawbacks that accompany 529 plans, including:
- Plans can impose high management fees.
- A different plan is offered by each state, and the rules and requirements can vary a great deal from state to state. You’re not limited to using your state’s plan, so you’ll want to carefully research your options.
- Each state’s plan has its own rules as to which investment options are available, and these investment options can be limited.
- Money withdrawn from a 529 plan for any purpose other than paying for a beneficiary’s higher education expenses will result in taxes and penalties.
Before investing in a 529 plan, you’ll likely want to get the advice of an experienced advisor. It’s important to be aware of the advantages and disadvantages of the various plans, and it’s also important to be aware of other options for investing toward a loved one’s education.