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Video: What Is a 529 Plan Contribution?

Updated for Tax Year 2020


OVERVIEW

A 529 plan contribution is a way to save some money on taxes through contributions to an account that can be used for education expenses. Get the facts on a 529 plan contribution with help from TurboTax in this video on tax tips.


Video transcript:

Hello, I'm Adrienne from TurboTax with some important information for parents.

Do you plan on helping your children with the cost of college? If so, you should consider putting money away in a 529 plan and save some money on taxes too.

  • A 529 plan is similar to some of the retirement plans you may contribute money to each week.
  • Although no deduction is allowed for your contributions to the account, the balance can grow tax free on contributions.
  • This means you never pay taxes on the interest or dividends your money earns.
  • As long as you only make withdrawals to pay for the beneficiary's qualified education expenses such as tuition, books and room and board, balances remain tax free.

These plans are also quite flexible.

  • You can set up multiple accounts for different beneficiaries including yourself and others who are not your children.
  • If you change your mind, you can always change the beneficiary.

Before you set up one of these plans, you should be aware that two types exist, prepaid tuition plans and college savings plans.

  • The funds you contribute to a prepaid tuition plan may be guaranteed by your state, but generally you are restricted to certain low risk investments and there are some limitations on what schools the student will be able to attend.
  • If you are looking for higher annual returns, then the college savings plan may be just right for you but because of the higher level of risk, states will not guarantee your funds in a college savings plan.

For more information about this and other tax topics, visit TurboTax.com.

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