529 education savings plans: Holiday gifts with lasting benefits

As the holidays approach, you may be wondering what to buy your grandchildren or other young family members this year. Beyond traditional gift-giving ideas such as toys, clothes or games, helping to fund a child's education is a gift worth giving — and one that can have lasting benefits.

You can potentially help the beneficiary to:

• Ease self-funding burdens and lessen potential future debt
• Access educational opportunities that might not be pursued otherwise
• Add value to their lives for years to come

A 529 is a gift that parents appreciate too, as reflected in a recent Edward Jones survey. Of the more than 2,000 participants polled, 34% of parents saving for their children’s education preferred that friends and family contribute to 529 plans and education savings goals instead of giving gifts like toys or electronic gadgets for holidays and birthdays.

What is a 529 plan?

A 529 education savings plan is a tax-advantaged investment account that can be used to pay for qualified education expenses for the account's beneficiary.

A 529 plan’s earnings accumulate tax free, and withdrawals are federal income tax-free and penalty-free, as long as they’re used for qualified higher education expenses. If distributions are used for nonqualified expenses, earnings are subject to taxes and a 10% penalty.

Qualified postsecondary education expenses include:

• Tuition and fees
• Books
• Required school supplies
• Room and board — the beneficiary must be at least a half-time student; includes off-campus housing up to the cost of on-campus room and board
• Computers and related accessories, such as printers, internet access and educational software primarily used by the beneficiary

Although 529 plans offer federal tax benefits, they're sponsored by individual states. This means that while they're treated the same for federal taxes, state tax treatments can vary. Each state offers different plans with its own investment options.

Benefits of a 529 plan

Anyone can contribute to the account.

In addition to the account owner, anyone can contribute. This includes grandparents, family friends, parents and others, regardless of their income. Contributions from friends and family members are treated as gifts to the beneficiary.

A 529 plan offers tax benefits without income phaseouts.

Plan contributions aren’t deductible for federal income tax purposes, but many state plans offer state income tax deductions for contributions. Earnings grow tax free.

Some other education savings options (such as Coverdell accounts or education savings bonds) are subject to income limitations to receive the tax benefits, while others (such as taxable accounts and custodial accounts) don’t offer tax benefits. A 529 plan offers tax benefits regardless of how much income the account owner has.

The account owner maintains control over the funds.

The account owner retains control over the funds, so they can ensure those funds are used how they wish.

The beneficiary has dedicated funds for their education.

In funding the beneficiary’s education, a 529 plan may offset some or all of what they would have had to take out in student loan debt.

The beneficiary can be updated to any eligible family member.

The account owner sets up the account for one beneficiary. If the named beneficiary decides not to attend school, the account owner can change the beneficiary to another eligible family member, such as a sibling.

Investment options offer potential growth for funds.

Money contributed to 529 plans can be invested, such as in mutual funds and exchange-traded funds, to allow for potential growth over time. As with any investment, a 529 plan can experience market fluctuations that may affect its value when redeemed.

High contribution limits.

Contribution limits are set by the state offering the plan, and all 529 plans prohibit contributions once the account balance reaches a certain point, typically more than $235,000. The actual amount varies depending on the plan.

For states that offer a state income tax deduction for contributions, many limit the amount of annual contributions that can be deducted. Additionally, contributions are treated as gifts, so most people will want to stay within the annual gifting limit (which for 2024 is $18,000 for single filers and $36,000 for married filing jointly).

How Edward Jones can help

A gift to a 529 plan is a valuable way to help your friends or family members fund future educational opportunities — not to mention a great holiday gift. Your Edward Jones financial advisor can work with you to determine whether a 529 gifting strategy is right for you and your family’s financial goals.