How Does a 529 Plan Work, and What is It?
529 Plan: How Does it Work?
Saving for college - or any other future educational goal - is a smart move and a big investment. By opening and contributing to a 529 account, you are helping your loved one cover the high costs of tuition, room and board, and essential supplies like computers and books. Some states provide additional benefits to their residents who save with a 529 plan. For example, South Carolina’s Future Scholar 529 College Savings Plan allows South Carolina residents to deduct their entire contribution amount from their state tax returns.
Read more to learn how a 529 plan works, the many benefits of these plans for beneficiaries and contributors, and how you can contribute today!
What is a 529 Plan?
A 529 plan is a tax-advantaged education savings account. It's one of the best tools to save for a child's education – whether that’s college, a registered apprenticeship program, or trade school– thanks to its tax benefits, flexibility, and ease of use.
In a nutshell, 529 plans were specifically created to provide families with a tax-advantaged way to save for future educational costs. Contributors can make regularly occurring contributions or one-time gifts the money invested in a 529 account has the opportunity to grow tax deferred over time.
And when it comes time to use your savings? The funds aren’t subject to any taxes on withdrawal when used for qualified education expenses. It’s an important benefit that means every single dollar goes towards your education savings goal.
How Does a 529 Plan Work?
One of the best things about a 529 account is how easy it is to start one. To begin, an individual (or married couple) opens a new account, names a student beneficiary and makes an initial contribution or ongoing contributions.
The 529 account owner isn't the only person who can make contributions. In fact, anyone can add money to a 529 account, including family members and friends.
And 529 accounts offer flexibility. Contributions are invested based on the investment option chosen by the account owner(s). Popular choices include age-based options, which automatically shift over time based on the beneficiary’s age, and target allocation options, which align with specific savings goals.
When the time comes, the 529 account owner can withdraw the money from the account tax-free if it is used for qualified education expenses. Those expenses include the cost of tuition, housing, food, certain school supplies, and more. Funds saved in a 529 plan can actually be withdrawn and used for any purpose. However, the earnings portion of withdrawals for non-qualified expenses are subject to state and federal taxes, as well as a potential penalty.
The Benefits of 529 Accounts
Now you know how a 529 plan works – but you should also know the big advantages that come with saving with one of these accounts. Both beneficiaries and contributors can reap major rewards in the long run.
Key Benefits for Future Learners
Of course, the biggest benefit for any 529 participant is the opportunity for tax-deferred growth. The sooner contributors start saving with a 529 account, the more time that money has to compound those returns!
Savings from a 529 plan can make a student’s educational dreams significantly more affordable. Plus, 529 account savings can be combined with other forms of financial aid, like grants, scholarships, and more.
It’s easier than ever to combine 529 plan distributions with other forms of financial aid. The recent FAFSA Simplification Act, for example, has altered the law so that distributions from 529 accounts owned by grandparents are no longer reported as income on FAFSA applications. Grandparents can now open and fund 529 accounts without worrying about limiting federal aid for their grandchildren.
Key Benefits for Contributors
For contributors, saving money in a 529 plan for a loved one is its own reward. Knowing that you can provide a child or grandchild with the gift of an affordable education is a priceless feeling.
529 plan contributions can also provide you with some helpful tax breaks, which are not available with traditional savings accounts. In South Carolina, for instance, contributions to the Future Scholar 529 plan can be deducted from your state taxes every single year. In 2024, you can contribute up to $18,000 as an individual or $36,000 as a married couple, before the federal gift tax applies.
Do you want to make sure your child or grandchild can pursue whatever educational program they want in the near future? Instead of making regular contributions, you can make a lump sum contribution of up to five times the annual gifting limit, provided you don't make another 529 contribution for the same beneficiary for the next five years. That’s a $90,000 contribution from an individual or a $180,000 contribution from a married couple, invested in a 529 account until your loved one needs it!
How Can You Contribute to a 529 Account?
It’s easy to either open or contribute to a Future Scholar 529 account right now.
For instance, you can create a new 529 account by visiting futurescholar.com and enrolling in the program. Once you open your account, you can make contributions when you like, or set up automatic contributions making saving simple and stress free. Once your account is open, you can even invite friends and family to contribute to the account.
What If You’re Not in South Carolina?
Even if you’re not a South Carolina resident, you can still invest in a 529 account. The Future Scholar 529 plans is available to residents of other states through financial advisors, and speaking with a financial advisor can help you determine which 529 plan is best for you.
Get Started with Future Scholar!
Saving for education doesn't need to be complicated - or time consuming. 529 plans enable family members and friends to pool their savings and give a child the priceless gift of education. And with Future Scholar, opening or contributing to a 529 plan is easy – get started today!
