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What are the Tax Benefits of 529 Plans?

Aug 2, 2012

Using a 529 plan to save for your child's college education is smart because it helps you save in the most tax advantaged way. The growth of your is totally tax free if you use it for college expenses, plus you can save more when you do your tax returns every year.

The benefits are impressive:

  • State Income Tax Savings: Contributions to a 529 plan may reduce your state income tax liability, depending on the state. Visit to see how it works in your state. 
  • Tax-Deferred Earnings: Earnings on 529 accounts are tax deferred and, if used, for qualified higher education expenses — such as tuition, room and board and related expenses — are federal income tax-free. 
  • Favorable Estate Tax Treatment: Because assets held in a 529 plan are generally not subject to federal estate tax, any contributions made to the program aren't included in your estate. 
  • Accelerated Gift Tax Treatment: Since 529 plans qualify for a special gift tax exclusion, you can contribute up to $13,000 to each beneficiary's account annually without gift tax consequences. Or you can contribute a lump sum of up to $65,000 ($130,000 for married couples) once per five-year period without paying gift tax.
  • Creditor Protection: In some states, money invested in a 529 plan is protected from creditors in case of bankruptcy or lawsuit settlements.
And — just think — if you're getting a tax refund this year, what better place to put it than in a 529 plan?

Got further questions? Catch me on twitter and DM me @529SavingsPlans or e-mail me at 529CollegePlans at Want to be heard? Leave a reader comment below.

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