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529 College Savings Plans Explained

June 6, 2013 by  


The basics of investing in 529 plans

Section 529 plans have become a popular way to save and invest for your child’s college education. If you’re new to 529 plans, you might wonder how they work. These 10 common questions and answers will help get you up to speed.

1. How does a 529 college savings plan work?

Also known as a Qualified Tuition Program, a 529 college savings plan is a great way to save and invest for a child’s future college education.

2. What are the tax advantages of a 529 plan?

Any earnings in a 529 plan have the potential to grow free of federal income taxes. And when you withdraw funds for your child’s higher-education expenses, you generally won’t pay federal taxes, and you may not have to pay state taxes.1

There’s no federal income tax deduction for contributions to a 529 savings plan. But many states offer state tax deductions for contributions.

3. Who can open a 529 plan? Who can contribute?

It’s not just parents who can open 529 plans—anyone can, like a relative or a family friend.

And even if you didn’t open the 529 plan, you can still contribute to it. For example, a grandparent can contribute to a 529 college savings plan set up by the child’s parents.

4. Who has access to the money in the plan?

The assets remain in the control of the person who opened the 529 college savings plan—for example, a parent. So decisions about how the funds are used are always in your hands.

5. What can the money in a 529 college savings plan be used for?

Funds can be used to pay for qualified higher-education expenses1, such as tuition, fees, books, as well as room and board at colleges, universities and vocational schools. For 2010, the costs of computers and certain computer technology have also been deemed as qualifying expenses.

College Savings Tip #2

If your child receives money as gifts on birthdays and holidays, make it a habit to deposit the cash in your child’s 529 college savings plan.

6. How should I invest the 529 college savings plan?

Most 529 plans offer a variety of investment options, including stock mutual funds, bond mutual funds and money market funds. Consult a financial advisor to determine your best investment choice. Please remember there’s always the potential of losing money when you invest in securities.

7. Are there contribution limits?

The total contribution limit depends on your plan, but most 529 college savings plans offer a contribution limit higher than $200,000.

You can contribute up to $65,000 ($130,000 for married couples) in a single five-year period without incurring gift taxes, as long as there are no other gifts made to the child in the same five-year period.

8. What if my child doesn’t go to college?

Every Section 529 college savings plan has a designated beneficiary. If that person doesn’t go to college, the account owner can change the beneficiary to another family member, like a sibling.3
You can also withdraw the money, but earnings will be taxable, and you’ll generally pay an extra 10% penalty tax on top. 2

9. What happens if the parents divorce or declare bankruptcy?

A 529 college savings plan is an asset of the account owner, often one of the parents. In a divorce settlement, the 529 plan will be treated as an asset—for example, in some states, it can be split into two separate 529 college savings plans.

What about bankruptcy? Depending on many factors, including which state your 529 college savings plan is in, it might not be protected from creditors.

10. Do I have to choose my own state’s 529 college savings plan?

No—you can compare the features of 529 plans offered by other states and choose the one that is most suitable for you.

Generally, a student can use a 529 college savings plan to attend college in any state. Qualified higher-education institutions include all accredited post-secondary institutions that are eligible to participate in Federal Student Assistance Programs. This broad list includes public universities, private colleges, graduate schools, vocational schools and even some foreign schools.

If you still have questions, learn more about the 529 college savings plan at Bank of America’s Student Center. As with most savings plans, the earlier you start, the more the funds have the potential to grow. Try setting up an automatic monthly transfer into your 529 college savings plan to make saving that much easier.

What’s next? How to apply for scholarships and financial aid

Before you invest in a 529 plan, request an official statement and read it carefully.  The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the 529 plan, which you should consider carefully before investing.

You should also consider whether your home state or your beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s 529 plan.

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