529 Education Savings Plans

Between normal, day-to-day expenses, and long-term goals like retirement, figuring out how – and how much – to save for your child's education can be challenging.

One financial strategy you might consider? Setting up a 529 plan, which is a tax-advantaged way to put aside money for future education costs. Your Edward Jones financial advisor can help you determine how a 529 plan might work with your overall financial strategy, as well as think through specific questions you might have:

• Is a 529 a good fit for you?
• What is your family's education savings goal?
• What investments might make sense for you and your education goals?

How they work

Anyone – at any age – can be the beneficiary of a 529 plan. The account owner, not the beneficiary, controls the account and makes all the investment decisions. And if the beneficiary decides not to attend college, the owner can generally change the beneficiary to another eligible family member.

Grandmas, grandpas, family friends, parents … anyone can contribute to a 529 plan, regardless of income. Contribution limits depend on the state's plan but are typically more than $200,000.The federal gift tax exclusion allows a contributor to give up to $15,000 per year per beneficiary, or $30,000 if you're giving as a married couple.

You could also choose to give up to five years of gifts in one year, and that amount is generally not considered to be a part of your estate for federal estate tax purposes. However, if an electing contributor dies during the five-year period after the contribution, amounts of the contributions allocable to years after death are included in the contributor's gross estate.

The 529's earnings accumulate tax-free, and withdrawals are federal income tax-free and penalty-free as long as they are used for qualified education expenses. Some examples of qualified post-secondary education expenses include:

• Tuition and fees
• Books
• Required school supplies
• Room and board – if the beneficiary is considered at least a half-time student (including off-campus housing – the equivalent of what it costs to live on campus)
• Computers and related equipment (such as printers), Internet access, and educational computer software used primarily by the 529 plan beneficiary

Distributions used for nonqualified educational expenses are subject to ordinary income tax plus a 10% penalty on the earnings portion of the distribution.

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