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What are the tax benefits of a 529 plan?

Founder & CEO

Here are the quick facts on 529 plan tax benefits:

Contributions are never tax-deductible for Federal taxes.
Contributions are sometimes tax-deductible for state taxes, it depends on the state you're in. 

Among states that offer tax benefits, some require you to use their own 529 plans while others do not. (Our interactive AboveBoard College Savings Guide will walk you through the rules in your state)

Your 529 plan savings grow free from any future taxes when you use the money for qualified educational expenses at eligible schools.**

Have questions about what "qualified educational expenses at eligible schools" means? We explain here.

**Except in Alabama. More on that below, if you care.

Check your local taxes, if your state offers a tax break.

Some places, including New York City, permit the same tax deduction that exists at the state level on your local taxes.

Contributions to 529 plans count as gifts for Federal tax purposes.

You can gift up to the annual gift tax exclusion ($14,000 / giver-receiver pair in 2017, $15,000 in 2018).

Example: Two parents gift $30,000 to each of their 2 children in 2018

529 plans offer a special option to accelerate 5 years of gifting.

Example: two grandparents open a 529 plan for their grandchild in 2018 and contribute $150,000

($150,000 = 2 gift-givers * $15,000 annual exclusion for giver-receiver pair * 5 years)

These grandparents cannot give any additional gifts during those 5 years using the annual gift tax exclusion -- they have already "used up" those annual exclusions

Want clear, honest info about saving for college in your state?
Check out our interactive guide tailored to your situation and goals.
Go to our College Savings Guide

**Alabama has a different approach from any other state: it collects state income tax on any gains in out-of-state 529 plans when you do a qualified withdrawal. The typical approach, followed by all the other states, is not to tax gains in 529 plans (regardless of which state's plan) so long as the money is used for qualified educational expenses at eligible schools (aka a "qualified withdrawal").

Wallis is the Founder & CEO of AboveBoard Financial, a company reinventing investment advice and insurance with revolutionary transparency and honesty. Wallis spent over 10 years at Goldman Sachs as an investment banker and hedge fund investor in financial institutions. She founded AboveBoard to cut through the BS and present important choices with clarity and compassion. Wallis lives in New York City with her husband and two young children.