To start with the basics, a 529 plan is legally known as a “qualified tuition plan.” It is a tax-advantaged plan that has as its primary purpose to encourage savings for the cost of a college education. All states (other than Wyoming), as well as the District of Columbia, offer at least one type of 529 plan. Account owners of 529 plans do not have to be a resident of a state to establish a 529 plan in that state; they are free to choose which state best meets their particular situation. Once a 529 plan is opened, the source of contributions is not limited to the owner; anyone can contribute to it.
- A 529 plan is a tax-advantaged plan designed primarily to encourage savings for the cost of a college education. All states (except Wyoming) and the District of Columbia offer them. Contributions are made with after-tax dollars, investment growth is tax-free, and distributions are tax-free if the funds are used for qualified education expenses.
- The beneficiary or account owner of a 529 plan receives a Form 1099-Q, Payments From Qualified Education Programs (Under Sections 529 and 530), which shows the gross distributions from the plan and the amount of the distributions that represents earnings. If the gross distribution amount shown on the form exceeds the amount of qualified education expenses, part or all of the earnings shown on the form may be taxable to the distributee.
- Qualified higher education expenses are tuition and fees as well as books, supplies, and equipment required for enrollment. Subject to certain limitations, they also include room and board expenses and computer-related expenses. Qualified higher education expenses also include up to $10,000 per year for K-12 tuition for any public, private, or religious school and a $10,000 lifetime maximum of student loan expenses.
- Most states with an income tax offer a tax deduction or a credit for contributions to a 529 plan. While almost half of the states limit the deduction to residents who select the 529 plan offered by their home state, nine states allow a deduction regardless of which state administers the 529 plan.
- A 529 plan can be rolled over to another 529 plan without triggering income tax if the rollover is for the benefit of the same beneficiary or a family member (defined broadly). Beginning in 2024, beneficiaries will be able to make rollovers from 529 plans to Roth IRAs of up to a lifetime total of $35,000, subject to certain restrictions.
- For some taxpayers, a Roth IRA can be a useful alternative to a 529 plan for saving for higher education. But Roth IRAs lack some of the tax and other advantages for education savings of 529 plans.