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529 Plans: Information and FAQ’s

What is a 529 plan?

A 529 plan is an education savings plan designed to help families set aside funds for future college costs. While contributions to 529 plans are not deductible on federal tax returns, the investment grows tax-deferred, and distributions to pay for the beneficiary's college costs are federal tax-free. Families only pay federal income taxes on earnings that are not used to pay for college costs.

Most states offer their own 529 plans, and many of these also include tax incentives for that state’s income tax. For example, Connecticut 529 plans are called CHET plans and they offer Connecticut income tax incentives.

has a great search tool to identify the 529 plans available in each state.

Why are 529 plans so popular?

In addition to the tax benefits stated above, 529 plans are popular because:

• The donor stays in control of the account. With few exceptions, the named beneficiary has no rights to the funds. The donor decides when withdrawals are taken and for what purpose. Most plans even allow donors to reclaim the funds for him or herself any time, no questions asked.

• 529 plans are low maintenance. Once an individual sets up an account, ongoing investments for the account are handled by the plan, not the individual.

• 529 plans allow for generous contributions. Many states’ plans allow for over $300,000 in contributions per beneficiary.

Should the plan be held in the name of the parent or the student?

Because 529 plans are reported as an asset in financial aid forms, and because parent assets are assessed at a much lower rate (5.6%) than student assets (20%), most families will choose to create the plan in the name of the parent.

Can savings from a 529 plan from one state be used to pay for college in another state?

Yes, 529 plan savings can be used to meet the costs of qualified colleges nationwide.

Who can be a beneficiary of a 529 plan?

Generally, anyone can be listed as the beneficiary of a 529 plan, so long as he/she is a U.S. citizen or permanent resident. The beneficiary does not have to be related to the owner of the plan.

Can the beneficiary of a 529 plan be changed once the account is opened?

Yes, but to avoid tax penalties the new beneficiary needs to be a relative of the original beneficiary.

If a family has multiple children, should the family open one 529 plan per child?

Yes, most financial planners would recommend opening separate 529 plans for each child to avoid a situation where the family needs to draw funds from the plan for more than one child at a time.

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