The Tax Benefits of 529 College Savings Plans

college savings planA tax-friendly tool to help a child pay for college may help you pass along generational wealth. For families interested in the educational future of a child, a 529 Savings Plan offers the means for parents and grandparents to help beneficiaries pay for tuition down the road.


A 2012 report from the U.S. Government Accountability Office (GAO) found that families who used 529 accounts were generally more affluent than those who did not. According to the Securities and Exchange Commission (SEC), all 50 states and the District of Columbia offer at least one type of 529 plan. Plans are also available through investment firms and other financial groups and entities.


There are several advantages to qualified tuition plans including:

  • When setting up a 529 account, families can choose between two types of plans. One program allows the purchase of future tuition credits at today’s prices, and the other allows you to invest money that will eventually be used to pay for qualified educational expenses.
  • Holders of qualified plans can get a tax credit in some states for money invested in a 529 account on behalf of a beneficiary. No taxes are paid when the money is cashed out for tuition or for educational expenses.
  • A 529 can help your family build generational wealth legally over time. A 529 initiated for a particular beneficiary can later be changed to benefit another beneficiary, such as a sibling, or the children of the original beneficiary. The potential return on investment in a 529 over time can boost the value of the account in ways that a bank account could not. There is currently no sunset date for a 529 account—it can be established and used for years in service of a family and its financial profile.


A recent federal spending package added incentives for families to open 529 accounts—the ability to roll leftover 529 account funds into a Roth IRA. In the past, some investors declined to use 529 accounts given the uncertainty of whether a child might choose to attend college. The new rule allows beneficiaries to roll their funds into a Roth IRA should they choose not to go to college.


There are details of course—rollovers are limited to $35,000, and other restrictions. For wealthy taxpayers, a 529 account may reduce tax liability while saving for future educational endeavors.


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