A 529 plan is a tax-advantaged savings plan designed to help pay for the cost of education. With the cost of education rising over the years, parents have started to open a 529 plan for their children to help assist them with the cost of tuition. Originally limited to post-secondary education costs, it has been expanded to cover K-12 education, apprenticeship programs, student loan repayments, and even funding a Roth IRA (starting January 1, 2024). 529 plans are sponsored and run by the 50 states and the District of Columbia. Rules and fees from 529 plans differ from state to state.

Types of 529 Plans

529 plans are categorized as either college savings plans or prepaid tuition plans. College savings plans work like a 401(k) or Roth IRA by investing your contributions into mutual funds or similar investments. This account will go up or down in value depending on the performance of the investments chosen.

Prepaid tuition plans let you prepay all or part of the cost of education at an eligible college. This plan currently only exists in nine states, of which Oklahoma is not one of them.

Contributions

A 529 account is usually opened by parents or grandparents on behalf of a child or grandchild, who will be the account’s beneficiary. There are no yearly contribution limits to a 529 plan, but each state has a different total contribution limit that falls in between $235,000 and $550,000, which is dependent on the full cost of attending college and graduate school in that state. Contributing more than $17,000 to a 529 account or multiple accounts with the same beneficiary could trigger a gift tax.

Tax Advantages

Withdrawals from a 529 plan for a qualified educational expense are exempt from federal and state income taxes. Other withdrawals are subject to taxes plus a 10% penalty, with exceptions for certain circumstances such as death or disability. What is contributed to a 529 plan is not tax deductible for federal income tax. However, more than 30 states, including Oklahoma, currently provide tax deductions or credits of various amounts for contributions towards a 529 plan.

Qualified Expenses

Qualified expenses include college, graduate, or vocational school tuition and fees, elementary or secondary school (K-12) tuition and fees, books and supplies, student loan payments, off-campus housing, campus food and meal plans, computers, internet, and software used for schoolwork, and special needs and accessibility equipment for students. Our advisors at First State can help you create a 529 plan for your children today. To get started, call (918) 492-1361.

This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk, and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.