Benefits and Features: Tax Advantages of 529 Plans

Accumulate savings faster with tax-deferred growth

The money you earn in a 529 plan is not subject to federal or state income taxes as long as it remains in the plan. This can help your account grow faster since all of your earnings can be reinvested, increasing returns with tax-free compounding. In addition, no federal or state taxes are due to the federal government or to most states* when money is withdrawn from your 529 account and applied to qualified expenses: tuition, room and board, books, supplies, fees and required equipment at most colleges, graduate schools and universities.

The Power of Tax-Deferred Growth Potential

529 plans provide compounding growth potential in a tax-deferred account, which may provide substantially more growth potential over time than a taxable account.




The Value of Tax Deferred Growth Chart





The returns are hypothetical and do not represent the performance of any investment. This illustration assumes that no withdrawals are made that would not qualify as educational expenses. It is intended to compare a taxable investment account and a 529 tax-deferred account under the following assumptions: A) one lump-sum contribution of $65,000 of after-tax amounts is invested and all earnings, gained an annual average rate of 6.5%, compounded annually, are continually reinvested; and B) the taxable account is subject to an annual income tax on earnings at an aggregate rate of 30% (which may be both federal and state). No assumptions are made as to the disposition of the accounts following the 10th year.

Section 529 Qualified Tuition Programs are intended to be used only to save for qualified higher education expenses. These Programs are not intended to be used, nor should they be used, by any taxpayer for the purpose of evading federal or state taxes or tax penalties. Taxpayers may wish to seek tax advice from an independent tax advisor based on their own particular circumstances.

Note: Before investing, you should consider whether your state of residency, or your intended beneficiary’s state of residency, offers a state tax deduction or any other benefits that are only available for investments in that state’s 529 savings program.

*Sources: “A Complete Guide to 529 Plans,” Joseph F. Hurley, CPA, 2009, The Wall Street Journal, September 14, 2008.

AGI-2016-06-28-15765

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