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529 Plans: Common Questions and Answers – And Potential Tax Savings

What is a 529 Plan?

These plans are named after Section 529 of the federal tax code. The 529 plans are a great vehicle to save money and let it grow tax-free. The requirements for guaranteeing the tax free growth are simple – use the money in the 529 plan for qualified education expenses.

Tax Benefits and Implications

529 plans are a great way to accumulate wealth for future generations to use towards education and have that wealth grow income tax free and also estate tax free if used in the proper way.

A contribution to a 529 plan is considered a gift to the beneficiary of the plan. There may be gift tax reporting requirements and gift tax consequences if you give more than $14,000 to any particular beneficiary during the year.

There are limits on the amount that can be contributed into a 529 plan. These limits are generally between $300,000 and $400,000, depending on the state sponsoring the plan.

You can use any state 529 plan. You are not required to use the plan of your resident state; however there may be tax benefits if you use your resident state 529 Plan. Illinois allows for a subtraction of the contribution amount up to $20,000, if your filing status is married filing joint.

Qualified Education Expenses

Qualified education expenses can be a variety of things. They include tuition, fees, book, and room and board. A beneficiary can even use them to purchase a computer so long as they are enrolled in an eligible educational institution.

Plan Eligibility

Anyone can set up a 529 plan. There are no income limitations on who qualifies to set up a 529 plan. The beneficiary can be anyone as well – a child, grandchild, relative, friend, and even yourself.

An eligible educational institution is generally any university, college, or vocational school that is attended as postsecondary education. If you are curious if your institution qualifies, there are websites that list all qualified institutions (https://ope.ed.gov/accreditation/).

How Can DHJJ Help

If you have questions on how your 529 Plan impacts your taxes, please contact DHJJ Financial Advisors at 630-420-1360.