What are the advantages of a 529 college savings plan?

What are the advantages of a 529 college savings plan?

Tax-deferral can have a dramatic affect on the growth of an investment. With a state-sponsored 529 College Savings Plan your contributions can grow tax-deferred (some states allow contributions to be partially or completely deductible) and distributed income tax-free as long as distributions are used for qualified education expenses such as tuition, fees, room and board at higher education institutions.

There is no limit on contributions but some states tend to limit contributions once the plan assets have reached a defined maximum (typically $230,000 – $500,000). Under a special election, you may make contributions per beneficiary in a single year without triggering a federal gift tax by accelerating five years’ worth of contributions – based on the applicable gift tax exclusion amount*.

Assets are professionally managed by fund managers selected by the state. Participants can choose from two to almost 30 mutual fund-type investments. Control of the account remains with the contributor regardless of the age of the beneficiary.

* This gift is viewed as an accelerated gift over five years. Any other gifts to the same beneficiary by the contributor within five years may result in a federal gift-tax liability. If the contributor dies within the five-year period, a prorated portion of the contribution may be included in his or her taxable estate for federal estate tax purposes.