529 Plan Tax Benefit and Advantages
Regardless of how much you invest, these tax advantages help you maximize your college savings:
- Tax-Deferred Growth — Contributions grow free of federal and state income taxes while in the account.
- Tax-Free 529 Withdrawals — No income tax is paid on the growth of your account when withdrawals are used for qualified expenses.
- State Tax Deduction — Deduct your contributions from your taxable income. Check with your state for specific tax benefits. For example, Kansas taxpayers receive an annual adjusted gross income deduction of up to $3,000 (or $6,000 if you're married and filing jointly) for contributions per child.
The availability of tax or other state benefits (such as financial aid, scholarship funds and protection from creditors) may be conditioned on meeting certain requirements, such as residency, purpose for or timing of distributions, or other factors.
- Estate Planning & Accelerated Gifting — Reduce your personal taxable estate through accelerated gifting (learn more about accelerated gifting). This means you can make five years' worth of gifts up to $75,000 (or $150,000 if you're married and filing jointly) to your 529 account in a single year without being subject to gift taxes. This benefit is unique to 529 plans.
The difference between tax-free growth and taxable growth (in other investments) can be significant. Using these tax benefits means you are putting your money to work for you!
Assumptions: $2,500 initial investment with subsequent monthly investments of $100 for a period of 18 years; annual rate of return on investment of 5% and no refunds withdrawn during the time period specified; taxpayer is in the 30% federal income tax bracket for all options at the time of contributions and distribution. This hypothetical is for illustrative purposes only. It does not reflect an actual investment in any particular 529 plan or any taxes payable upon non-qualified distribution.
IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
The availability of tax or other benefits may be conditioned on meeting certain requirements, such as residency, purpose for or timing of distributions, or other factors.
The earnings portion of non-qualified 529 withdrawals is subject to federal and state income taxes and a 10% federal penalty.
No additional gifts can be made to that beneficiary over the next four years after the year in which the one-time gift is made. If the donor of an accelerated gift dies within the five-year period, a portion of the transferred amount will be included in the donor's estate for estate tax purposes. Consult with a tax advisor regarding your specific situation.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.