How a 529 plan works

Provided by ADVISYS, INC.

A 529 education savings plan is a tax-favored program operated by a state designed to help families save for future education costs.

Graphic displaying information covered in this article between a 529 plan and tax free and taxable withdrawals.

A "529" education savings plan is a tax-favored program operated by a state designed to help families save for future education costs. While the fees, expenses and features of these plans will vary from state to state, as long as a plan satisfies the requirements of Section 529 of the Internal Revenue Code[1], federal tax law provides tax benefits for both the contributor and the beneficiary.

Education savings plan

  • A tax-advantaged account to save for education.
  • Earnings accumulate tax deferred.
  • Does not guarantee admission.
  • If a beneficiary does not use funds, a new beneficiary can be designated.

Tax-free withdrawals — Withdrawals for education

  • Withdrawals for qualified expenses are generally tax-free.
  • Qualified expenses generally include tuition, books, fees, supplies, equipment and room and board.

Taxable withdrawals — Non-qualified

  • Any part of a withdrawal that is not applied to a qualified expense is considered non-qualified.
  • The earnings portion of non-qualified amounts is taxable and a 10% penalty is generally applied.

[1] Federal law does not allow income tax deductions for contributions to 529 plans, although growth inside a plan is tax-deferred and qualified distributions are tax-exempt. State or local tax law can vary widely. 529 plans involve investment risk, including possible loss of funds, and there is no guarantee an education-savings goal will be met.

These materials were reproduced with the permission of Advisys, Inc. No State Farm® entity prepared these materials nor does State Farm represent or warranty the opinions or statements expressed therein. These materials are being provided for information purposes only.

Before investing in a 529 plan, consider the plans investment objectives, risks, charges, and expenses. Contact the plan issuer for an official statement containing this and other information. Read it carefully.

Neither State Farm nor its agents provide tax or legal advice.

Investors should consider before investing whether their or their beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program and should consult their tax advisor, attorney and/or other advisor regarding their specific legal, investment or tax situation.

Qualified higher education expenses include tuition, fees, textbooks, supplies and equipment (including computers) required for enrollment or attendance and certain room and board expenses for the academic term during which the student is enrolled at least half time at an eligible educational institution. Expenses for special-needs students that are necessary in connection with their enrollment or attendance may also be eligible.


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