Three Reasons to Give 529 Plans a Second Look

After the 2007-2009 stock-market plunge wreaked havoc with the performance of some 529 college-savings plans, there were fears that parents would take their education savings and go elsewhere. But in fact, assets in college-savings plans increased 25% in 2012 to more than $166 billion, according to Morningstar, Inc.

This comeback isn't entirely surprising, given the stock-market rebound since early 2009. But even without strong market performance, 529 college-savings plans remain an intriguing choice--for three reasons.

First, 529s offer significant tax benefits. While contributions to 529 plans aren't tax-deductible on your federal return, the money grows tax-deferred and withdrawals are tax-free as long as they're used for qualified education expenses. You may also get a state-tax deduction, but to qualify you will likely have to fund an in-state 529 plan.

Second, you can invest substantial sums, no matter what your income. In 2013, single individuals can contribute up to $14,000 to a 529 plan without worrying about the gift tax, or a lump sum of $70,000 in the first year of a five-year period. During the following four years, no additional contributions can be made. Married couples can contribute up to $28,000 this year, or $140,000 if they're counting it as their gift for the next five years. Keep in mind that if you die before the end of this five-year period, a pro-rated share of your gift will be added back to your estate.

Third, 529 plans are typically considered the parents' asset for purposes of determining financial aid. That means that, unlike money held in a child's name, 529 plan assets may have a relatively limited impact on aid eligibility.

INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE

Source: Asset growth quoted in April 22, 2013, press release from Morningstar, Inc.

The tax law is complicated and subject to change in the future. Citigroup Inc. and its affiliates do not provide tax or legal advice. You should seek advice based on your particular circumstances from an independent tax advisor. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

You should consider the investment objectives, risks, charges, and expenses of any 529 Plan Investment Options carefully before investing. This and other information is contained in the 529 Plan Disclosure Document and official statement, which should be read carefully. Before investing, you should read the Plan Disclosure Statement and official statement carefully and consider whether your state of residency-- or your intended Designated Beneficiary's state of residency--offers any benefit, such as a state tax deduction, which is only available for investments in that state's 529 savings program.

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