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529 plans enable you to invest for higher education free of federal and, sometimes, state income taxes.* States or schools can sponsor a 529 plan. Most are open to residents of all states. Some plans allow you to invest between $200,000 and $300,000 on behalf of one child, so a 529 plan may be your best bet for fully funding a college education.
There are 2 types of 529 plans:
Some states offer their residents income tax deductions or other breaks on contributions to their 529 plans. The investment earnings on out-of-state plans may be subject to your state's income tax.
Before contributing to any plan, consider its investment options, costs, residency requirements, and minimum and maximum contribution limits. You should be aware of any sales commissions or sales loads, which can cut into the value of your college investments.
Check the investment options to see if they suit your needs, and pay careful attention to the program's costs. Expenses for state programs vary—from 0.50% of assets per year to 2.0% or more of assets annually (the national average is 1.04% a year, according to Cerrulli Associates) for plans not sold through a broker. Plans sold through a broker are generally more expensive and can charge sales loads as high as 5.75% on all contributions. Expenses add up and can substantially reduce how much you accumulate for higher education.
Look closely at your own state's plan because it may provide state income tax deductions, credits, or exemptions for contributions to its 529 plan. A few states even offer matching contributions. Such benefits are just one factor to consider when deciding which plan to use. You may find another state’s plan is more appropriate for you even though you won’t get a break on state income tax. Or you may find that a plan's high costs would offset any tax or other benefits you'd receive.
Maybe. Your state may provide state income tax deductions, credits, or exemptions on contributions to its 529 plan. A few states even offer matching contributions and creditor protection of 529 assets if you declare bankruptcy. Such benefits are just one factor to consider when deciding which plan to use. You may find another state's plan is more appropriate for you even though you won't get a break on state income tax. Or you may find that a plan's high costs would offset any tax or other benefits you'd receive.
Only states and schools can sponsor 529 plans, but they often retain firms such as Vanguard to manage the assets in their plans and to provide administrative services.
Vanguard has teamed with Upromise Investments, Inc. and the state of Nevada to offer The Vanguard 529 College Savings Plan, which gives you access to low-cost Vanguard investments and high contribution limits. With 19 individual portfolios designed for a wide range of investing styles and three age-based investment tracks, this 529 plan can help you build your college savings. Plus, you'll get easy account management through vanguard.com.
Also, several other states have incorporated Vanguard investments as part of their savings options. Learn more about 529 plans offering Vanguard investments, or visit the Vanguard College Savings Center to research college savings options, calculate college costs, and create a plan to help meet your goals.
Can I move a 529 investment into another option offered by that plan or roll over the assets into another state's plan?
Many states allow you to change investment options once each calendar year without incurring fees or tax consequences. You also can roll over your 529 plan assets into another state plan once in any 12-month period, although you may have to pay fees or state income tax. The College Savings Plans Network offers a link or phone number to contact your state's 529 plan.
What happens if my child doesn't go to college, or I end up with more money in the account than is needed for college?
You may name another eligible family member as beneficiary on the account and use the 529 assets to pay for that person's education.
If no eligible family members can be named beneficiary, then you might have to close the account, paying federal and possibly state income taxes and a 10% federal penalty tax on earnings not used for qualified higher-education expenses.
The penalty is usually not imposed if the beneficiary doesn't need the money because he or she has received a scholarship or because the beneficiary has died or become disabled.
Can I transfer my child's Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account into a 529 plan?
Earnings on UGMA or UTMA assets that aren't held in 529 accounts are taxed at the beneficiary's rate. Moving UGMA or UTMA assets into a 529 account allows you to take advantage of the federal tax-free treatment of earnings used for qualified higher-education expenses. However, there are potential disadvantages to moving UGMA or UTMA assets into a 529 account.
That depends on your situation and goals. Here are some of the issues to consider:
More details are available in How will I pay for college?
Yes. Both options offer federal tax-free education investing as long as the money is spent on qualified higher-education expenses such as tuition, fees, books, and room and board.* Section 529 plans can be used for post-secondary education (college and graduate or professional school), while ESAs can be used for post-secondary education expenses as well as expenses for primary and secondary education.
Can I choose my own investments in a 529 plan?
Most 529 plans offer a limited number of investment options from which participants must choose. A few 529 plans offer self-directed investment options through brokers. You can learn more about state plans from the College Savings Plans Network.
* Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal tax penalty as well as state and local income taxes. The availability of tax or other benefits may be contingent on meeting other requirements.
For more information about The Vanguard 529 College Savings Plan, call 866-734-4530 or visit www.vanguard.com to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. Vanguard Marketing Corporation, Distributor and Underwriter.
If you are not a Nevada taxpayer, consider before investing whether your or the designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program.
The Vanguard 529 College Savings Plan is a Nevada Trust administered by the Board of Trustees of the College Savings Plans of Nevada, chaired by State Treasurer Kate Marshall.
The Vanguard Group, Inc., serves as the Investment Manager and through its affiliate, Vanguard Marketing Corporation, markets and distributes the Plan. Upromise Investments, Inc., serves as Program Manager and has overall responsibility for the day-to-day operations, including effecting transactions. The Plan’s portfolios, although they invest in Vanguard mutual funds, are not mutual funds. Investment returns are not guaranteed and you could lose money by investing in the Plan.