Basic Benefits of 529 College Savings Plans

Families who want to invest for higher education are turning more and more to 529 College Savings Plans because of the potential tax advantages and opportunity for growth1.

529 College Savings Plans are named for the section of the federal tax code that governs them. The plans are usually operated by investment companies for a sponsoring state, although potential investors don’t have to be a resident of that particular state to open a 529 plan2.

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Anyone can open a plan – parents, grandparents, aunts, and uncles can contribute money toward an account set up on behalf of a future college student. The money is then invested in one or more portfolios, which the plan owner can select.

529 College Savings Plan Advantages

• Tax benefits on earnings – Interest can accumulate on a federal income tax-deferred basis, which means assets can potentially compound faster than if they were in a taxable investment (money you’d otherwise pay out in taxes remains invested).
• Tax benefits on withdrawals – In addition, withdrawals are free from federal income taxes when used for qualified higher education expenses3. They may be exempt from state income taxes, as well, but rules vary from state to state, so talk to your WoodmenLife Financial Representative and tax advisor.
• Portability – Whomever opens the account retains ownership. So if the intended grandchild receives a full-ride scholarship, for example, the account can be transferred to another grandchild, the parent or other qualified person for their educational expenses.
• Investment choices – Most plans give the account owner the choice to invest in a portfolio based on the intended beneficiary’s age, or the flexibility to customize their investment fund options.
• Control over the money you invest – As the plan owner, you can change the beneficiary at any time, you can adjust your initial investment selections and only you can request withdrawals.
• Contribution flexibility – There are generally no income restrictions governing who can contribute to a 529 plan. Many plans have aggregate plan asset limits of more than $200,000. In other words, contributions are allowed until plan assets for an individual beneficiary reach that limit.
• Estate planning features – A contribution to a 529 plan is generally considered a completed gift from you to the plan beneficiary. That means the money is no longer part of your taxable estate, and contributing regularly may be an effective estate planning strategy4.