Generally, you can open a 529 plan for any person, even yourself, regardless of age or your income level. The assets remain under your control, and you can usually contribute as little as $25 a month or as much as you like, up to the plan's contribution limits.
A 529 plan is considered an asset of the account owner, not the beneficiary. Since most colleges expect parents to contribute only a small percentage of their assets each year for education funding, the 529 plan should have less effect on your child's eligibility for financial aid.
Every state offers some type of 529 plan. Although each state's plan is different, most allow contributions from residents and nonresidents alike. The funds in a 529 plan can be used at an accredited college anywhere in the U.S., regardless of which state's program you invest in. Certain states offer tax deductions or tax credits for in-state 529 plan contributions.
Contribution limits on 529 plans are much higher than other educational savings options. Total contribution limits vary by plan but can average between $235,000 and $295,000 per account. There's no limit to yearly contributions beyond the maximum allowed in the account. However, contributions over a certain amount could trigger federal and state gift tax.
You can contribute up to $11,000 per year to a 529 plan without paying any gift taxes ($22,000 for married couples). The total you can give without federal gift taxes increases to $55,000 in a single year ($110,000 for married couples) if you make no additional contributions for five years. 529 plan contributions are considered "completed gifts" by the IRS, so the money is excluded from the contributor's estate. If the contributor dies within the five-year period, a proportionate share of the contributed amount may need to be added back to the contributor's estate.
Any designated beneficiary enrolled in an accredited educational institution can use 529 plan funds tax free to pay qualified higher education expenses. The following are some examples:
-
Tuition and mandatory fees
-
Books
-
Supplies
-
Equipment, including computers if required
-
Room and board (for students enrolled at least half-time)
Distributions for qualified higher educational expenses can be taken anytime. They're generally federal tax free if the total of the year's distributions is equal to or less than the adjusted qualified education expenses for that year. Some states don't tax qualified distributions for residents who have invested in their own state's 529 plan. Consult a tax advisor for the state-specific rules.
If the 529 plan's beneficiary receives a scholarship, an amount equal to that scholarship may be withdrawn without penalty. Note: this amount is subject to ordinary income taxes. Money withdrawn for nonqualified distributions is subject to state and federal taxes and an additional 10% tax penalty on the gain.
If the account beneficiary decides not to attend college or doesn't use all of the money, the 529 plan can be transferred to a qualified family member. You can also roll any amount from one 529 plan to another if it's for the same person or a qualified family member. Note: This type of transfer is allowed only once a year per 529 plan.
529 plan assets are professionally managed in a portfolio of investments. Depending on the state and the individual 529 plan rules, you have two options of how your money can be invested by fund managers:
-
Age-based—The fund manager invests your plan assets depending on age and how long it'll be before funds will be withdrawn. In general, the longer the investment time horizon, the more aggressively your assets can afford to be invested. The shorter, the more conservatively. This is most common 529 investment method.
-
Fixed asset—You work with the fund manager to choose one mix of investments, and it remains constant for the life of the plan. This is the simplest 529 investment method.
Note: No matter which option you choose, you're allowed to change your investment style one time per calendar year.
Most 529 plans include certain fees and expenses. They differ by plan but may include annual account fees, annual administration fees and sales charges. Consult the individual 529 plan descriptions for specific fee and expense information.