Save for college and save on taxes with 529 college savings plans
Gift tax: part of the federal, unified gift and estate tax system. Gift tax applies to taxable gifts you give during your lifetime. Estate tax applies to taxable distributions from your estate after you pass away.
Getting a tax break on the money you save for higher education is the big draw of section 529 plans. 529 plans, generally operated by the state you live in, come in the form of either a college savings plan or a prepaid tuition plan.
College savings plans
With a college savings plan, you contribute to an account that you can eventually tap to pay for qualified higher education expenses at any private or public school in any state. Nearly every state in the U.S. has its own college savings plan, and the various plans differ from state to state.
Contributions to a college savings plan are not deductible for federal income tax purposes, but some states may allow their residents to deduct contributions for state income tax purposes (please note, certain limitations do apply.) Withdrawals for qualiﬁed higher education expenses are exempt from federal, and in most cases, state income taxes. Qualiﬁed expenses include, among other things, tuition, fees and certain room and board charges. If money from a college savings plan account is used for nonqualiﬁed purposes, earnings on that money become subject to federal and state income tax in addition to an additional federal 10% tax. A state penalty may also apply.
A college savings plan offers multiple investment options for your account balance, and these options vary from plan to plan. As the account owner, you maintain control of the account, choosing among the investment options and deciding when to take withdrawals.
There are no income restrictions tied to a college savings plan. There are also no annual contribution limits, but there are maximum account balances which vary by state, and are more than $200,000 per student. You can transfer an account to any eligible family member, including a sibling or ﬁrst cousin of the current beneﬁciary.
Prepaid tuition plans
Prepaid tuition plans are 529 plans offered by some states to allow you to guard against inflation by locking in current tuition rates. By contributing to a prepaid tuition plan (typically on an installment basis), you prepay tuition at any covered public college or university located in the state operating the plan.
Your contributions go into an account that gets credited with any investment earnings based on average tuition increases. You are not given any other investment options. Although your contributions are not deductible for federal income tax purposes, some states may allow residents to deduct contributions for state income tax purposes. Any earnings on your account that are used to pay qualified tuition are federal income tax free, and may be exempt from state and local taxes as well.
You can combine a prepaid tuition plan with other savings options. For example, you could use the prepaid plan for tuition and a college savings plan for other qualified expenses, such as room and board.
Keep an eye on the federal gift tax
Contributions to a 529 plan being used to fund someone else's higher education are considered gifts. Under the annual gift tax exclusion, contributions of up to $13,000 per beneficiary ($26,000 in the case of a married couple making the contributions) are exempt from federal gift tax. Speak with a qualified financial advisor before contributing an amount in excess of the annual gift tax exclusion.
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Consider the investment objectives, risks, charges and expenses before investing in any of the TIAA-CREF Tuition Financing, Inc. managed 529 College Savings Plans. Please call 888 381-8283 for a Disclosure Booklet containing this and other information. Read it carefully.
Before investing in a 529 plan, you should consider whether the state you or your designated beneficiary reside in or have taxable income in has a 529 plan that offers favorable state income tax or other benefits that are only available if you invest in that state's 529 plan.
The tax information herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor. Nonqualified withdrawals may be subject to federal and state taxes and the additional federal 10% tax.
Account values in the Investment Options are not guaranteed and will fluctuate based upon a number of factors, including general market conditions.
TIAA-CREF Tuition Financing, Inc. (TFI) serves as program manager for various 529 College Savings Plans.
These product features can vary from state to state. Please check your state's 529 Plan Program Brochure and Program Disclosure Booklet for more details. If you would like to speak with a college savings consultant, please call 888 381-8283.
The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons. Please note that investing involves risk.