Don’t Make This Mistake With a 529 Plan

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College 529 plans are one of the most popular ways Americans save for the college expenses of their children. As of the middle of 2022, there were 15.92 million 529 savings accounts holding $412.5 billion, according to the College Savings Plan Network. While these tax-advantaged accounts are effective tools for meeting future education needs, a 2023 analysis conducted by J.P. Morgan found that overfunding a 529 plan can result in a large tax bill if money remains in the account after the beneficiary has graduated.

What Is a 529 plan and how does it work?

A 529 plan is a special education savings account dedicated to paying for future college expenses. Under Section 529 of the Internal Revenue Code, money that’s contributed to a 529 plan can be invested in mutual funds and similar securities, and then grow on a tax-deferred basis. That money can later be withdrawn tax free if it’s used to pay for qualified higher education expenses, like tuition, room and board, books, computers and other needs. However, withdrawals for non-qualified expenses will incur a 10% penalty on top of income taxes.

But money saved in a 529 plan is not limited to college. Up to $10,000 can be withdrawn each year to pay for qualified K-12 education expenses. And with the passage of the SECURE Act in 2019, 529 plan owners can now take up to $10,000 worth of tax-free withdrawals per beneficiary to repay student loan debt. This is a lifetime limit, not an annual one.