Why Choose a 529 Plan?

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When planning your college saving strategy, you may wonder how a 529 compares to other options available, such as Coverdell education savings accounts, U.S. Savings Bonds, individual retirement accounts and insurance plans.

529 plans offer a combination of advantages not available from other options. These include state and federal tax advantages; high contribution and income limits; multiple investment choices; and flexibility with respect to age, income and residency.

529 plan features

  • Pay qualified higher education expenses, including tuition, fees, books, room and board, supplies and equipment
  • Use at public and private schools around the world, including graduate schools and many types of training programs
  • Open an account with a low minimum contribution (varies by state)
  • Contribute as often as desired — monthly to periodically
  • Select from a variety of options that may include investment accounts, prepaid tuition programs and FDIC–insured savings accounts (choices vary by state)
  • Transfer to another beneficiary if original beneficiary does not use (varies by state)

Tax implications

  • When withdrawing 529 account funds, pay no federal or state taxes on the original contributions because you funded the account with after–tax money
  • Pay no federal or state taxes on earnings in the account when you use the 529 funds for qualified higher education expenses
  • May earn a tax deduction or credit for contributions in 34 states including Virginia
  • Make up to five years of contributions per beneficiary at one time gift–tax free under favorable federal gift tax rules. Your contributions are considered completed gifts for federal estate tax purposes.

Financial aid and scholarship considerations

  • Minimal impact on federal financial aid. Parent– or student–owned 529 plans are considered a parental asset by the FAFSA and assessed at a maximum 5.64 percent when determining the expected family contribution. Distributions from parent– or student–owned accounts also are excluded in the following year’s financial aid calculations.
  • Withdraw funds penalty–free for scholarships and other qualified uses. Income tax on the interest and state taxes may still apply.

Other benefits

  • No income limits
  • No beneficiary age limits (except for prepaid tuition programs) (may vary by state)
  • Maximum account balance per beneficiary set by each state’s plan
  • No annual contribution limit (gift tax–exclusion limits still apply)

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