6 Tax Rules for 529 Plans

Investing in a 529 plan, a college savings account exempt from federal taxes, could help alleviate some of the financial stressors that surround funding a college education.  Below are six tax rules you should consider before investing in a 529 plan:

1. Contributions are not deductible.  While some states do allow deductions, the money is not deductible on Federal taxes; however, there may be other tax credits available.
2. Contributions are made with after-tax dollars.  The growth on your investment is not taxed so long as it is used for qualifying education expenses. 
3. Higher taxes for non-educational use.  A ten percent penalty will be assessed to any money taken from a 529 plan that is not used for higher education.
4. The beneficiary can be changed.  If you create a 529 plan for one child and the money is not used, it can be rolled into a 529 account for another child without a tax penalty.
5. Funds available for vocational training.  For 529 plans, the tax benefit extends to money used at vocational and technical training, not just colleges and universities. 
6. Contribution limits.  Contributions are subject to gift-tax limits of $14,000 a year.  A larger amount can be treated as a contribution over a five-year period for tax purposes. 

See Karen Ridder, 6 Tax Rules for 529 Plans You Should Know, Newsmax, Apr. 28, 2015.