Potential Tax Benefits of a 529 Plan

Funding and utilizing a 529 college savings plan may result in three different tax benefits.

1. Potential for State Tax Credit or Deductions for Contributions to a 529 Plan.

Many states offer at least one 529 College Savings Plan that allows residents to apply for a potential state income tax deduction or credit for yearly contributions.

It is important to note that the 2021 annual gift tax exclusion per donor, per recipient is $15,000. There are various ways to optimize these gift tax exclusions when funding a 529 college savings plan.

2. Tax-deferred Growth of Investments in a 529 Plan

Funds that are invested within a 529 College Savings Plan are tax-deferred as they grow, similar to retirement accounts (IRAs, Roth IRAs, 401(k)s).

3. Tax-free Distributions for Qualified Educational Expenses.

If the funds withdrawn from the 529 College Savings Plan are utilized for qualified educational expenses, they may be withdrawn tax-free.

Qualified expenses include:

Tuition and Fees
Room and Board
Books and Supplies
$10,000 for K – 12 Education Tuition, annually per beneficiary*
$10,000 in Student Loan Debt, lifetime limit per beneficiary*

*While these two expansions of qualified higher education expenses apply to apply federally, state-level qualification varies. State specific information should be obtained prior to making distributions. Non-qualified distributions are subject to income tax and a potential 10% penalty.