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§529 Education Savings Plans

A §529 education savings plan, named after the tax code section authorizing its existence, is a state-sponsored education savings plan. All funds contributed into §529 education savings plan and all earnings realized can be used to pay for educational expenses at most accredited U.S. colleges and universities.

Beginning with the 2018 tax year, the IRS now allows you to spend up to $10,000 of your §529 funds annually to pay for elementary and high school education at a public, private or religious school. This can be a big help to parents who want to enroll their children in private schools.

The principal advantage for investing in a §529 education savings plan is that all earnings (i.e., interest, dividends or capital gains) realized on the amounts invested are compounded tax-free at the Federal and state levels. Nor are these earnings taxed when you withdraw them, as long as you use them for qualified educational expenses like tuition, room and board, books and equipment, like a laptop.

Although it’s usually parents and grandparents who open §529 accounts, any U.S. resident who is 18 years or older can open one. When you open a §529 account, you are the owner, or “participant”. You control the §529 account. You decide when and how much money to invest, and you’re in charge of distributing the money. The beneficiary of the account can be anyone you choose, including yourself, as long as they have a Social Security or Federal Tax ID number. You can change the beneficiary at any time.

In 2018 and 2019, the annual §529 plan contribution limit is $15,000 per recipient. For 2014 through 2017, the annual §529 plan contribution limit had been $14,000. What this means is that each individual may contribute up to $15,000 into another individual’s §529 plan each year, without incurring any gift tax liability. A married couple may contribute up to $30,000 into another individual’s §529 plan (a split gift of $15,000 each). There is no Federal or State deduction allowed for making such §529 plan contributions, however.

The IRS allows a special provision whereby an individual may prorate their contributions into a §529 education savings plan. For additional details regarding this special provision, please visit Gifts and Gift Taxes.

The owner of a §529 plan can withdraw money from it at any time for any reason. However, if the withdrawn funds are not used to pay for educational expenses, the earnings portion will be subject to both Federal and state income tax, and an additional Federal penalty tax of 10 percent will be levied.

 

Massachusetts §529 Education Savings Plans

The Commonwealth of Massachusetts offers two state §529 education savings plans through the Massachusetts Educational Financing Authority (FEMA), a not-for-profit state agency whose mission is to help Massachusetts students and families access and afford higher education and reach financial goals through education programs, tax-advantaged savings plans, low-cost loans, and expert guidance. These state §529 education savings plans are:

U.Fund College Investing Plan. This is a tax-advantaged investment plan, professionally managed by Fidelity Investments. The U.Fund College Investing Plan follows the same approach as other Fidelity plans established in Arizona, Delaware and New Hampshire. It features three age-based options; one using Fidelity mutual funds; one using Fidelity index mutual funds; and a third multi-firm option with portfolios that invest in funds offered by several different companies. The plans also offer 11 static options, and one option that invests in an interest-bearing deposit account.

U.Plan Prepaid College Tuition Plan. Participants purchase tuition certificates that lock in tuition and mandatory fees at their current rates. Earnings on the bonds that back the certificates are tax-free. The U.Plan can only be used to attend one of approximately 80 Massachusetts colleges or universities.

 

Massachusetts §529 Tax Benefits

Beginning in 2017, Massachusetts residents can claim a deduction for contributions they made into a Massachusetts §529 plan on Massachusetts Schedule Y, line 18. This deduction is limited to $2,000 (married couples filing jointly; $1,000 for single filers). These contributions must have been made into either of the Massachusetts §529 plans described above.

This Massachusetts deduction for contributions made into a Massachusetts §529 plan remains in effect through the 2021 tax year.  

 

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