There are no income restrictions limiting who can open a 529 plan. You can contribute up to $15,000 annually to a given child’s 529 without triggering gift tax. Those who are fortunate enough to have $75k to invest can make five years’ worth of contributions in one go, gift tax free.
Plans offer low-cost, “age-based” investment portfolios. Initially, they’ll be invested 100% in stocks. Over time, bonds get added to the mix, until the accounts hold just bonds and CDs when the child reaches 18. Funds grow tax-free, and, so long as distributions are used for qualified expenses, they will also be free of tax. “Qualified expenses” include:
- Tuition and mandatory fees.
- Room and board during the academic year, up to the maximum given in the university’s financial aid calculator or the amount actually charged if the student is living in university-operated housing.
- Books, supplies and equipment.
- Expenses to address special educational needs.
- Computers, software and internet service.
There are some expenses students face that are not considered “qualified expenses,” namely:
- Health insurance payments.
- Expenses and fees related to sports teams and health clubs/gyms.
- Electronics and smart phones.
- Travel to/from campus and local transportation expenses.
When opening a 529 account, you are not required to invest in your own state’s plan. That said, more than thirty states give their residents tax incentives to stay in state. Find out who and how much in this chart.
A handful of states are so generous as to give their residents tax breaks for investing in any state’s 529 plan. Find out who and how much here.
So, given all of the above, why are some parents – and, in my experience, especially grandparents – reluctant to use 529’s? I’ll get to that in my next post.