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What is a 529?

One of the best tools available to help you give the gift of a college education is a 529 college savings plan.
529 plans were established to help parents and grandparents save money for post-secondary or higher education that can be used at schools across the country.

With the many attractive features and benefits they offer, 529 plans have become one of the most popular ways to save for college. A 529 plan lets you take advantage of tax-advantaged investing, control, and flexibility.

  • Tax-advantaged investing
    • Tax-deferred investment growth
    • Tax-free (federal and state) withdrawals for qualified expenses* 
    • Gift- and estate-tax benefits
  • Control
    • You determine how assets are used
  • Flexibility
    • Use at a wide range of eligible institutions anywhere in the country
    • Use for qualified expenses including tuition, some fees, books, and certain room and board costs

And most importantly... you'll have the peace of mind that you are saving to help the child in your life have a more successful, brighter future.

Make your money work harder

As you can see in the chart below, the difference between tax-free growth and taxable growth can be significant.
If an investor opened a 529 account with an initial investment of $2,500 and contributed $100 every month for 18 years, there could be over $6,300 more for a qualified withdrawal than the same investment in a taxable account.*

 

 

 

 

 

 

 



 

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subsequent monthly investments of $100 for a period of 18 years; annual rate of return on investment of 5% and no funds withdrawn during the time period specified; and taxpayer is in the 30% federal income tax bracket for all options at the time of contributions and distribution.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 distribution.

Financial aid

529 plan assets are counted at different rates for the Expected Family Contribution (EFC) in the FAFSA formula.

  • If the student is a dependent, a 529 plan account is considered as the parent's asset (if the account owner is the parent or the dependent student). As a result, it will generally be counted at a rate of only 3-6% of its value for the EFC.
  • If the student is not a dependent and is the account owner, the 529 plan account is considered as the student's asset and is generally factored into the EFC at the higher rate of 20%.
  • In other cases, the account does not count as an asset for federal financial aid purposes. (However, a student may have to report distributions received from the account as income for these purposes.)
    Financial aid programs offered by educational institutions and other non-federal sources may have their own guidelines for the treatment of 529 plan accounts. For more information about financial aid eligibility, you should consult with a financial aid professional and/or the state or educational institution offering a particular financial aid program.**

* Earnings on non-qualified withdrawals are subject to federal income tax and may be subject to a 10% federal penalty tax, as well as state and local income taxes. The availability of tax or other benefits may be contingent on meeting other requirements.

** Federal and non-federal financial aid program treatments of assets in a 529 plan are subject to change at any time. You should check and periodically monitor the applicable laws and other official guidance, as well as particular program and institutional rules and requirements to determine the impact of 529 plan assets on eligibility under particular financial aid programs.

© 2014 Indiana Education Savings Authority and Upromise Investments, Inc., Member FINRA. All Rights Reserved.