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4 Steps to Help Maximize the Potential of 529 Plans


Citi Personal Wealth Management

There are many ways to build wealth for education, and 529 college savings plans are one of the most common. Operated by a state, a 529 plan may be used to pay for almost all college expenses (for example room, tuition and board) and just about anyone can open one (including grandparents). Withdrawals are tax-free as long as you use the money for qualified college expenses. But there are other benefits that aren't as well known. These four steps can help ensure you're making the most of 529 college savings plans.

  • Step 1: Determine if you're eligible for a state tax deduction. Several states offer a tax deduction for their residents who start a 529 plan. For example, participating in New York's 529 plan can mean a big tax savings for high earners who live in New York state. You can deduct up to $5,000 per year per person (or $10,000 for a joint filers).

  • Step 2: Find out if there are any scholarships or other benefits offered by your state's 529 plan. Some plans, such as New Jersey's 529 plan, offer some scholarship funds to state residents whose children attend a college in New Jersey.

  • Step 3: Figure out if your family wants to make accelerated contributions. With a 529 plan, you, your spouse and anyone else, such as grandparents, can each make contributions of up to $14,000 per year without paying the gift tax. But you can also make a lump sum of $70,000 in the first year of a five-year period, without worrying about the gift tax. Essentially, you are up-fronting the funding of the plan. One warning: If you elect to do so, and you die before the end of that five-year period, the portion of the gift of the five-year period that was allocated to the period after your death will be included in your estate.

  • Step 4: Take into account a 529 plan's expenses and investment options before making a decision. An important point: You can open a 529 college savings plan offered by any state, not just the one where you reside. A 529 plan offered in the state where you live may offer benefits such as a tax deduction, but are the annual investment management expenses higher than other 529 plans? And how do the investment options compare with other plans? You need to take into account all aspects of a plan before making a decision.

To help you better understand how a 529 college savings plan works and compares to other education savings products, such as the Coverdell Education Savings Account, here's a quick overview.

Similarities and Differences Between 529 Plans and Coverdell Accounts

Similarities Differences

Save for education by investing in stocks, bonds, mutual funds, and certificates of deposit.

A 529 typically allows changes to investments just once a year, while there are no such limits on the Coverdell.

Contributions aren't deductible on your federal income tax return, though a state-income tax deduction may be available for 529 contributions to in-state plans.

Coverdell contributions are capped at $2,000 a year. You can fund these accounts only if your income falls below certain income thresholds.

In contrast, anyone can contribute up to $14,000 to a child's 529 in 2017 without worrying about the gift tax.*

Earnings grow tax-deferred and you can make tax-free withdrawals as long as they're used for qualified education expenses.

Money in a 529 can be used only for higher education, while the Coverdell account can be tapped for expenses from kindergarten through college.

*With a 529 plan, you can also make a lump sum of $70,000 in the first year of a five-year period, without worrying about the gift tax. Essentially, you are up-fronting the funding of the plan. One warning: If you elect to do so, and you die before the end of that five-year period, the portion of the gift of the five-year period that was allocated to the period after your death will be included in your estate.

INVESTMENT AND INSURANCE PRODUCTS: NOT INSURED BY THE FDIC • NOT INSURED BY THE FEDERAL GOVERNMENT OR ANY OTHER FEDERAL GOVERNMENT AGENCY, BY THE BANK, OR BY ANY AFFILIATE OF THE BANK • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, THE BANK OR AN AFFILIATE OF THE BANK • SUBJECT TO INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL INVESTED

The information provided here is for informational purposes only. It is not an offer to buy or sell any of the securities, insurance products, investments or other products named.

This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed.

Citigroup and its affiliates do not provide tax or legal advice. 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. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.

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 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.

© Citigroup Citi Personal Wealth Management is a business of Citigroup , which offers investment products through Citigroup Global Markets (CGMI), member SIPC Insurance products are offered through Citigroup Life Agency LLC (CLA). In California, CLA does business as Citigroup Life Insurance Agency, LLC (license number 0G56746). CGMI, CLA and Citibank, are affiliated companies under the common control of Citigroup Citi and Citi with Arc Design and other marks used herein are registered service marks of Citigroup or its affiliates, used and registered throughout the world.

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