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How 529 Plans work?

| September 06, 2019
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Another school year has begun, and for some students it's senior year and college is the next step. For many colleges and universities, tuition is on the rise and it’s predicted to keep going up. This can hinder kids from getting further education than a high school diploma. So, what can you do to help save for your child’s future education?

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as "qualified tuition plans," are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. 529 plans may also be used to save and invest for K-12 tuition in addition to college costs.

A 529 college savings plan is a very simple way to save money for your kids’ or grandkids’ college education. There are a lot of benefits to having a 529 plan and here are some of them:

  • Anyone can contribute to the account. That means you, your spouse, friends, and family can all contribute!
  • You can set up an account for anyone! Your child, grandchild, friend's child, paperboy, or even yourself.
  • The child doesn’t have control of the account and doesn’t get control at a specific age- you have control!
  • If the child decides not to go to college, you can change the account beneficiary to another family member.
  • You pay no federal taxes on the account’s earnings, and distributions for qualified education expenses are tax free! Important: there may be taxes and penalties due for non-qualified distributions.
  • There may be state tax benefits for contributions depending on which state you live in (e.g. Minnesota taxpayers may be able to receive either a deduction or credit).
  • Most states have no age limit for when the money must be used. So, the 529 plan still can be used if the child decides to take a gap year (or 10!) before attending college.
  • You do not have to setup a plan with the state you live in, however, there may be tax benefits to do so (e.g. Minnesota residents may receive tax benefits even if their account is with another state sponsored plan outside of Minnesota).

Similar to planning for retirement, there are a variety of 529 plans available to help save money for college. Some plans are more flexible than others. To find out which plan is right for you or if you have any questions, give us a call!


Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through 360 Financial, a registered investment advisor and separate entity from LPL Financial.The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Prior to investing in a 529 Plan, investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. Non-qualified withdrawals may result in a federal income tax and a 10% federal tax penalty on earnings.

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