There are several benefits to opening an account in a 529 plan:
- College savings can grow exempt from federal income tax, and gains and withdrawals are also exempt from federal income tax when the funds are used to pay for qualified higher education expenses.
- The account owner has full discretion over how and when the funds are used, unlike custodial (UGMA/UTMA) accounts where the minor gains control when they reach the age of majority (18 or 21, depending on the state).
- The same plan can be used to fund college costs for more than one child or family member because account owners can change the beneficiary at any time to an eligible “member of the family” (as defined under IRS rules) of the current beneficiary.
- Some states provide a state tax deduction or credit for contributions and a subset of those states provide those state income tax benefit apply to contributions made in any 529 plan, not just that state’s plan.
- There are no income limitations restricting your ability to make a contribution to a 529 plan and no annual contribution limits (only a maximum contribution limit as further described in the last bullet point below) and, although contributions are considered completed gifts, gift tax exemptions are relatively high. Currently, an individual can contribute $14,000/year to each beneficiary under the annual gift-tax exemption, meaning two parents can contribute $28,000/year per child.
- 529 plans allow pre-funding of up to 5 years’ worth of exempt gifts (meaning a couple filing a joint return could contribute up to $140,000 per child when the initially fund a plan)–this is commonly known as “superfunding”.*
- The maximum contribution limit is high; account owners may contribute to the Wealthfront 529 College Savings Plan until the value of all Nevada-sponsored 529 accounts for that beneficiary reaches $370,000.
* If the donor does not survive the five-year period, a pro-rated amount will revert to the donor's taxable estate.
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