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Helping You Understand the Basics of 529 Plans

Posted by Leslie L. Horgan | Client Service Specialist
November 3, 2016

529 plans are college savings plans sponsored by state or educational institutions. Congress created them in 1996 to provide a tax-advantaged way for people to save for college or other post-secondary education.

There are numerous features of 529 plans and a wide variety of options when it comes to choosing one, so it’s prudent to consult a financial planner before making a decision. Below are some questions to help you understand the basics of 529 plans to help you get started.

Who qualifies for a 529 Plan?

Any U.S. citizen over the age of 18 and of any income level can open a 529 plan, and the beneficiary of the plan can be anyone with a Social Security number or tax I.D. The beneficiary can be a future college student of any age—the plan isn’t necessarily limited to people under the age of 18 who haven’t attended college yet. The owner of the 529 plan may also change the beneficiary (for example, to a different family member) if they wish.

How do 529 plans work?

Contributions to 529 plans are after tax, but the earnings grow tax-free on the federal level and may also qualify for state tax deductions. Once the beneficiary goes to college or a qualified post-secondary institution, distributions from the 529 plan that are used for qualified education expenses are not subject to federal tax.

What are “qualified education expenses”?

They generally cover education-related expenses such as tuition, fees, books, as well as room and board for the beneficiary.

Are there different types of 529 plans?

Yes, there are basically two types: prepaid tuition plans and savings plans. Each state has its own somewhat unique plan. States are permitted to offer both types of plans, though a qualified education institution can only offer a prepaid tuition type 529 plan.

Do I have to use my state’s 529 plan?

No, the market for 529 plans is competitive so you can use another state’s 529 plan if you like their incentives better. However, it’s important to compare the various features of 529 plans before deciding which one to potentially invest in.

Should I open a 529 account? How do I get started?

While there are many features of 529 plans and several potential benefits, they’re not necessarily for everyone.

Our Wealth Managers can help you evaluate your financial plan and goals to help determine if a 529 plan makes sense for you. They can also help you evaluate various 529 plans and explore the features and investment options for each. Call us today 1-800-541-7774 to get started.

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Leslie L. Horgan Client Service Specialist
By Leslie L. Horgan

Leslie is a Client Service Specialist at WrapManager, Inc.


Internal Revenue Service

Fidelity Investments


Additional Disclosure:

WrapManager, Inc. is not a tax advisory firm. We recommend you contact your tax attorney or CPA prior to utilizing any of the tax-related strategies mentioned or discussed.

Investment Planning 529 Plans