Introduction to College 529 plans

By Rajkamal Rao  

Image Courtesy: U.S. Department of Education
[We thank the State of Utah's My529 plan for technical content in this post.]

Section 529 of the Internal Revenue Code allows states, state agencies, and eligible educational institutions to sponsor qualified tuition programs (529 plans), which are tax-advantaged vehicles designed to encourage saving for future qualified higher education expenses and certain K-12 tuition expenses of a beneficiary.

If you're a parent, grandparent, or a relative of a student, you can become a 529 account holder. Anyone who is at least age 18, possesses a physical address in the United States and has a valid Social Security Number or Tax Identification Number can be an account owner. There are thousands of 529 plans in which you can invest. Contributions are on an after-tax basis, but any growth of the fund's value (through dividends and capital gains) is tax-free. This feature is the most attractive benefit of qualified tuition programs.

Anyone can contribute to a 529 account regardless of who owns the account, but only the account owner has control over how money is invested and used. Only the account owner is eligible for federal and state tax benefits. The maximum aggregate account balance for all 529 accounts for the same beneficiary is $485,000.

The account beneficiary is the student for whom you are investing money for their qualified higher education or K-12 tuition expenses. Any person with a physical address in the United States and a valid Social Security Number or Tax Identification Number can be a beneficiary.

Funds in the 529 plan can be used for "qualified" education expenses when the student attends an eligible educational institution. An eligible educational institution is any college, university, or vocational school in the United States or abroad qualified to participate in federal student aid programs. You can determine the eligibility of an educational institution by going to the U.S. Department of Education’s Database of Accredited Post Secondary Institutions and Programs (DAPIP) or the Federal Student Loan Program list.

To be considered a qualified withdrawal, money must be withdrawn from an account in the same period that educational expenses are incurred. Examples of qualified education expenses: 

  • K-12 tuition expenses of an account beneficiary who attends a public, private or religious school (up to $10,000 per calendar year per beneficiary from all qualified tuition programs). 

  • College tuition, mandatory fees, books, supplies, and equipment required for the beneficiary to enroll
    and attend an eligible higher educational institution.

  • A computer, peripheral computer equipment, software, and internet access while enrolled in
    an eligible higher educational institution.

  • Room and board, if the beneficiary is enrolled at least half time. Half-time enrollment is
    defined as half of a full-time academic semester or term workload. Costs cannot exceed the allowance for room and board as determined by the eligible higher educational institution.

Account funds that are used for any purpose other than to pay for the qualified higher education expenses are nonqualified withdrawals and are subject to taxes and penalties. Examples of nonqualified higher education expenses include:

  • Transportation expenses

  • Cellphone plans

  • Sports and fitness club memberships

  • Health insurance

A Note About Rao Advisors Premium Services
Our promise is to empower you with high-quality, ethical, and free advice via this website.  But parents and students often ask us if they can engage with us for individual counseling sessions.
Individual counseling is part of the Premium Offering of Rao Advisors.  Please contact us for more information.

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