How a 529 plan works

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.