How a 529 plan works

A 529 education savings plan is a tax-favored program operated by a state designed to help families save for future education costs.

Graphic displaying Education Savings Plan bullet points, Tax-free withdrawal bullet points, and Taxable Withdrawal bullet points.

A “529” education savings plan is a tax-favored program operated by a state designed to help families save for future education costs.  While the fees, expenses, and features of these plans will vary from state to state, as long as a plan satisfies the requirements of Section 529 of the Internal Revenue Codefootnote [1], federal tax law provides tax benefits for both the contributor and the beneficiary.

Education Savings Plan

  • A tax-advantaged account to save for education.
  • Earnings accumulate tax deferred.
  • Does not guarantee admission.
  • If a beneficiary does not use funds, a new beneficiary can be designated.

Tax-Free Withdrawals - Withdrawals For Education

  • Withdrawals for qualified expenses are generally tax-free.
  • Qualified expenses generally include tuition, books, fees, supplies, equipment, and room and board.

Taxable Withdrawals - Non-Qualified

  • Any part of a withdrawal that is not applied to a qualified expense is considered non-qualified.
  • The earnings portion of non-qualified amounts is taxable and a 10% penalty is generally applied.

return to reference[1] Federal law does not allow income tax deductions for contributions to 529 plans, although growth inside a plan is tax-deferred and qualified distributions are tax-exempt.  State or local tax law can vary widely.  529 plans involve investment risk, including possible loss of funds, and there is no guarantee an education-savings goal will be met.

Estos materiales fueron reproducidos con el permiso de Advisys, Inc. Ninguna entidad de State Farm preparó estos materiales y State Farm tampoco ratifica ni garantiza las opiniones o declaraciones expresadas en ellos. Estos materiales se ofrecen solo para fines informativos.

Antes de invertir en un plan 529, considera los objetivos de inversión, los riesgos, los cargos y los gastos del plan. Comunícate con el emisor del plan para tener una comunicación oficial que contenga ésta y otra información. Léela cuidadosamente.

Ni State Farm® ni sus agentes proveen asesoría fiscal o legal.

Investors should consider before investing whether their or their beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program and should consult their tax advisor, attorney and/or other advisor regarding their specific legal, investment or tax situation.

AP2019/05/0389


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