529 College Savings Plans

Establish a 529 College Savings Plan for a Child

More than a decade ago, Congress authorized a college savings alternative to help parents plan for the rising costs of college. Dubbed “529 college savings plans,” these 529 plans are professionally-managed, tax-advantaged portfolios that are offered by individual states. The majority of 529 plans have no residency requirement, which means you can “shop around” to find the plan that best suits your investment style.

Benefits of 529 College Savings Plans

Not only can 529 college savings plans help you invest in your child’s future and fund his or her education, they also offer a variety of benefits for you:

  • Tax advantages. Earnings from 529 college savings plans are exempt from federal tax when they are withdrawn for qualified higher education expenses. Some states even let you deduct a portion of your contributions from your state taxes. Withdrawals for nonqualified purposes may be subject to ordinary income taxes and a 10% IRS penalty. Any tax or other benefits may only be available when certain requirements are met.
  • Control of withdrawals. A 529 college savings plan’s beneficiary does not gain control of the money at a specific age. As the account owner, you will have complete control over withdrawals for the life of the account.
  • Family contributions. With 529 college savings plans, every holiday and birthday becomes an opportunity for family members and friends to contribute to your child’s college education.
  • No income restrictions. There is no income ceiling at which you become ineligible for opening a 529 plan account.
  • Flexibility. Most 529 college savings plans do not have an age or time limit for withdrawals. However, you can roll over the account to another child in your family or, if you should become unsatisfied with your 529 plan, you can roll it into another state’s plan.

Gifting to 529 College Savings Plans as an Estate Planning Strategy

As with any gifting program, you can gift as much as $14,000 annually to a child’s or grandchild’s 529 college savings plan without incurring gift taxes ($28,000 for a married couple), which removes those assets from your taxable estate.

However, a special tax provision actually lets you gift a higher amount to 529 college savings plans at one time. Currently you can gift a lump sum of $70,000 ($140,000 for joint filers) to a beneficiary’s 529 plan free from gift tax, which counts toward five years’ worth of annual exclusion gifts. This lump sum gift lets the child take advantage of the potential growth of 529 plan investments.

Note: If you gift a lump sum of five years’ worth of gifts, you can’t make any other gifts to the beneficiary for a five-year period without incurring gift taxes. And if you die within five years of the date of the gift, a portion of the gift may be subject to estate taxes. Wells Fargo Advisors is not a tax or legal advisor. Consult your tax advisor for more details about using gifting to 529 college savings plans as part of your estate planning strategy.

Before investing, you should consider whether your or your designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in that state’s 529 college savings plan.

Please consider the investment objectives, risks, charges and expenses carefully before investing in a 529 college savings plan. The official statement, which contains this and other information, can be obtained by calling your Financial Advisor. Read it carefully before you invest.

How Your Financial Advisor Can Help With 529 College Savings Plans

Wells Fargo Advisors offers a wide selection of 529 college savings plans. Your Financial Advisor can help you evaluate different 529 plans before you establish one for a child’s college fund and then review the account’s performance and suggest adjustments over time.