A 529 plan (also referred to as a qualified tuition program) is an educational savings option operated by a state or educational institution, with tax advantages that make it easier to save for college and other post-secondary training for a designated beneficiary, such as a child or grandchild.
There are two types of savings regimes for 529 plans. The first allows taxpayers to prepay tuition costs at today’s rates; the second type enables taxpayers to contribute funds to an account that will be used later to pay qualified education expenses at an eligible educational institution. All 50 states offer at least one type of 529 plan, and each state’s plan requirements vary.
Contributions to a plan are not deductible from taxpayers’ income. However, the earnings from a 529 plan are not subject to federal tax and are generally also not subject to state tax when used for the qualified education expenses of the beneficiary. Anyone can set up a 529 plan and name anyone as a beneficiary—a relative, a friend, even oneself. There are no income restrictions on you, either as the contributor, or the beneficiary. There is also no limit as to the number of plans you can establish.
Contributions cannot exceed the amount necessary to provide for the qualified education expenses of the beneficiary. If you contribute to a 529 plan, however, be aware that there may be gift tax consequences if your contributions, plus any other gifts, exceed $14,000 to a particular beneficiary during the year. There are no tax consequences if you change the beneficiary to another member of the family.
Qualified education expenses include tuition, fees, books, and room and board for students who attend school at least half-time.