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Tax Benefits of 529 Plans

529 Plans also provide many tax benefits that make investing in a 529 account a tax savvy option. Among these tax benefits are:

• The money you invest in a 529 Plan grows tax free while it is in the account.
• In addition, if you withdraw funds for the right purposes – namely qualified higher education expenses (such as tuition, fees, books, supplies and equipment required for enrollment or attendance at an eligible educational institution, along with certain room & board expenses) – you will not pay taxes on the earnings.
• If you live or pay taxes in a state that provides a state tax deduction or credit (34 of the 43 states that have an income tax do provide this tax benefit), then your contribution to a 529 Plan will qualify for that state tax deduction or credit resulting in added tax benefits to you for making the wise choice to invest in a 529 Plan.
• A contribution to a 529 Plan can be a very effective estate planning tool as it allows you, as the account owner, to control funds for your beneficiary while removing those funds from your estate.
• A contribution to a 529 Plan can be a great gift tax move if you want to take advantage of the five-year election to treat a contribution today (in excess of the annual gift tax exclusion) as being made over five years.
• Some 529 Plans even let you have your state income tax refund deposited directly into a 529 Plan account – how tax smart is that!

Please don’t hesitate to talk to your tax or financial advisor about these tax benefits or go to the resources tab of to learn more about the benefits that 529 Plans offer. Each state’s 529 Plan website also provides information specific to that state’s program, including the tax benefits of investing in a 529 Plan. The states’ websites can also be accessed at the CSPN website.

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