A Guide To Section 529 Savings Accounts For Beginners

Nov 07, 2022 By Susan Kelly

Many families place a high value on affording their children's or grandchildren's higher education. Investing in a Beginner's Guide to Section 529 Savings Accounts is a great way to grow your funds for college costs and give your kid a head start. This primer will provide an introduction to Section 529 plans, including an explanation of their benefits and drawbacks, their operation, and the types of people for whom they make the most sense. To learn more about the pros and cons of opening one, contact your financial advisor before making a final decision. They will be able to provide you with state-specific information and guidance on how to incorporate a 529 plan into your existing investing strategy.

What Is A 529 Plan For Saving?

As the name suggests, section 529 plans get their moniker from the provision of the Internal Revenue Code that allows for their creation and usage. A "qualified tuition program" (or "QTP") is another name for a 529 plan. No matter what you name them, 529 plans are often regarded as among the greatest vehicles for saving for higher education because of the significant tax benefits they provide. You may choose between a savings account as well as a prepaid tuition plan when it comes to a Section 529 plan.

Section 529 plans are the focus of this essay. Contributions to the Section 529 plan on behalf of either a beneficiary may be made after taxes have been taken out.

Who Is The Best Person To Invest In A Section 529 Plan?

It's highly recommended that parents and their grandparents who have any of the following establish a Section 529 savings plan:

  • You want to put away more than $2,000 annually in savings.
  • The income you're bringing in prevents you from qualifying for a Coverdell ESA.
  • You want to be able to retrieve the property for whatever reason suits you.
  • You are a resident of a state that allows residents to deduct contributions to a Section 529 plan from their state income taxes.
  • You're hoping to have a large family so all your kids can attend university.
  • In reality, you begin preparing for higher education for your children rather late in their lives.
  • You want to save significant money to cover your university's tuition and fees.
  • Your kids may enroll in pricey graduate schools.
  • You want to help pay for a child's college education while minimizing inheritance.

Potential Benefits

The benefits of Section 529 plans are numerous:

  • Gains are sheltered from taxes while withdrawals are exempt: Gains are tax-free if utilized to cover the beneficiary's eligible higher education costs.
  • There are no restrictions on a person's contribution based on their income: In contrast to other plans (namely the Coverdell ESA), the IRS does not limit the amount that may be contributed based on their income.
  • No limitations on contributions, in effect: A beneficiary's contributions "must not exceed the amount required to cover the beneficiary's eligible education expenditures."
  • A parent or donor may maintain ownership of the account for their child forever, according to Section 529. They may terminate the plan and get a refund (subject to penalties and taxes ).
  • Deductions for state taxes paid In 34 states and the District of Columbia, donors may get a tax break.
  • You might get up to $10,000 toward your good student debts. Recipients may use up to $10,000 on their existing student loan balances.

Potential Drawbacks

There are more benefits to Section 529 plans than drawbacks, but you should still be aware of them. The most significant is the $10,000 cap on withdrawals through Section 529 plans for elementary through high school education costs. However, you cannot easily trade between investments as you would with a standard brokerage account. You may change your investments (such as switching from one money market fund to another) multiple times a year or whenever the beneficiary changes.


Tax benefits may be maximized by contributing to a 529 plan, a savings vehicle for higher education. K-12 and professional programs were added in 2017, and expenditures for higher education would be covered starting in 2019. A 529 plan may be either a savings or maybe even a university fee plan. Growth in 529 plans is tax-deferred, and distributions for eligible higher education costs are tax-free. The benefit of an extra spending plan is that the account holder may lock in today's tuition prices for enrollment at participating schools in the future. That implies you can probably lock in a cheaper college tuition rate.

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