Basic Benefits of 529 College Savings Plans

Families who want to invest for higher education are turning more and more to 529 College Savings Plans because of the potential tax advantages and opportunity for growth.1

529 College Savings Plans are named for the section of the federal tax code that governs them. The plans are usually operated by investment companies for a sponsoring state, although potential investors don’t have to be a resident of that particular state to open a 529 plan.2

Anyone can open a plan – parents, grandparents, aunts, and uncles can contribute money toward an account set up on behalf of a future college student. The money is then invested in one or more portfolios, which the plan owner can select.

529 College Savings Plan Advantages

  • Tax benefits on earnings – Interest can accumulate on a federal income tax-deferred basis, which means assets can potentially compound faster than if they were in a taxable investment (money you’d otherwise pay out in taxes remains invested).
  • Tax benefits on withdrawals – In addition, withdrawals are free from federal income taxes when used for qualified higher education expenses.3 They may be exempt from state income taxes, as well, but rules vary from state to state, so talk to your Woodmen Financial Services Financial Representative and tax advisor.
  • Portability – Whomever opens the account retains ownership. So if the intended grandchild receives a full-ride scholarship, for example, the account can be transferred to another grandchild, the parent or anyone else for their educational expenses.
  • Investment choices – Most plans give the account owner the choice to invest in a portfolio based on the intended beneficiary’s age, or the flexibility to customize their investment fund options.
  • Control over the money you invest – As the plan owner, you can change the beneficiary at any time, you can adjust your initial investment selections and only you can request withdrawals.
  • Contribution flexibility – There are generally no income restrictions governing who can contribute to a 529 plan. Many plans have aggregate plan asset limits of more than $200,000. In other words, contributions are allowed until plan assets for an individual beneficiary reach that limit.
  • Estate planning features – A contribution to a 529 plan is generally considered a completed gift from you to the plan beneficiary. That means the money is no longer part of your taxable estate, and contributing regularly may be an effective estate planning strategy.4

Turn to the Pros Before Picking a Plan

With so many choices available in 529 plans, and so many differences among plans, you’re likely to have questions about how specific features relate to your situation. For help finding the answers, consult your Woodmen Financial Services Financial Representative and your tax and estate advisors.5

 

1. The availability of tax or other benefits may be conditioned on meeting certain requirements, such as residency, purpose for or timing of distributions or other factors.

2. By investing in a 529 plan outside of your state of residence, you may lose any state tax benefits. Non qualified withdrawals are subject to federal and state income tax and a 10% penalty. 529 plans are subject to enrollment, maintenance, management fees and expenses. Contact your tax advisor for details.

3. The earnings portion of non qualified withdrawals is subject to federal income tax, a 10% federal tax penalty, and state taxes and penalties.

4. This is a general example and does not take into account individual financial circumstances. If the contributor dies within the five-year period, a prorated portion of the contribution may be included in the taxable estate. For substantial transfers, the generation-skipping tax may apply if a beneficiary is two or more generations below the donor.

5. Woodmen of the World, its employees and Representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

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