These plans invest your contributions in mutual funds-like investment choices available in the plan with your after-tax money. You have several investment options to choose from, and the account’s value will go up or down based on the performance of your investment choices. If used for qualifying expenses, you can take the money out tax free*.
A 529 savings plan is a specialized savings account that is used to save money for education expenses. The money in a 529 plan may be used to pay for the college expenses and the K-12 tuition of the beneficiary, tax free. Many families find that 529 plans help them achieve their college savings goals.
529s are meant to fund any type of educational expense: books, college fees and tuition, trade school tuition, private K–12 education, off-campus housing, food and meal plans, computers, software, Internet services, any equipment that special-needs students may require, and some business purchases.1
The beneficiary of the account can be changed, as long as the new beneficiary is a family member. The money in the account can also be rolled over into the account of a sibling. (Make sure all rollover rules are strictly followed if you go this route.) But if assets in a 529 are used for something other than qualified education expenses, you'll have to pay both federal income taxes and a 10 percent penalty tax on the earnings. If the beneficiary gets a full scholarship to college, the penalty for taking the cash will be waived.
529 plans offer a potential for greater return on investment, but there is also greater complexity and greater risk of loss (should the beneficiary decide not to attend college or should the investments in which the plan is invested not perform well). A significant benefit of 529 plans is their favorable tax treatment.
The return on investment in a 529 varies depending on the investment options you select. Account values grow tax-deferred **, possibly helping you accumulate more cash for when those tuition bills start rolling in.
There is no penalty for leaving leftover funds in a 529 plan after a student graduates or leaves college. However, the earnings portion of a nonqualified 529 plan distribution is subject to income taxes and a 10% penalty. Alternatively, the beneficiary of the account can be changed, as long as the new beneficiary is a sibling or other eligible family member.
Under federal law, contributions to a 529 plan cannot exceed the expected cost of the beneficiary's qualified higher education expenses. Limits vary by state, ranging from $235,000 to $529,000.2
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* Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.
**The earnings portion of the withdrawals will be subject to ordinary taxes plus a 10% penalty if they are used for non-eligible expenses.
1 Farran Powell and Emma Kerr, “Qualified Expenses You Can Pay For with a 529 Plan,” US News & World Report, November 11, 2019. USNews.com
2 Kathryn Flynn, “How Much Can You Contribute to a 529 Plan in 2021?” Saving for College, February 25, 2021. SavingForCollege.com