529 plan

The statute allows two kinds. A prepaid plan sells tuition credits that entitle a beneficiary to the waiver or payment of qualified higher education expenses, and can be run by a state or by colleges and other eligible schools. A savings plan is an account that holds investments for the beneficiary's education costs, and only a state can run one. Contributions have to be made in cash, and they are not deductible on the federal return.

Qualified higher education expenses are defined in the statute. They include tuition, fees, books, supplies and equipment the school requires; a computer, software and internet access used mainly by the student while enrolled; and room and board for a student enrolled at least half-time, up to the greater of the school's allowance for it and, in the school's own housing, its actual charge. Elementary and secondary school tuition and some related costs count too, up to a yearly dollar cap set in the statute.

A withdrawal is not taxed as a whole when it pays for something else. The part that is contributions comes back untaxed. The part that is earnings is taxable income, and an additional 10% tax applies to that taxable amount, with exceptions that include the beneficiary's death or disability and amounts up to a tax-free scholarship.

A family withdraws $10,000 from a 529 in one tax year. The Form 1099-Q for it shows $4,000 of the withdrawal as earnings. The student's qualified expenses that year come to $7,500, with no tax-free aid and no education credit claimed on them.

IRS Publication 970 figures the taxable part in two steps. The earnings are multiplied by the share of the withdrawal that went to qualified expenses, $7,500 of $10,000, which makes $3,000 of them tax-free. The other $1,000 of earnings is taxable income, and the 10% additional tax on it is $100.

Earnings in the withdrawal

$4,000

Tax-free share (4,000 × 7,500 ÷ 10,000)

− $3,000

Taxable earnings

$1,000

The tax treatment turns on what the money pays for, measured across a tax year: the year's withdrawals are compared with the year's qualified expenses, less tax-free aid and less expenses used for the American Opportunity or Lifetime Learning credit. On the federal return, only the earnings in a withdrawal are taxable; the contributions in it come back untaxed.

A 529 has one beneficiary at a time. The beneficiary can be changed to a member of their family without income tax, and money moved within 60 days into a 529 for a member of that family owes no income tax either.

Taiga Finance's “College savings” planner, under Scenarios, projects the accounts and savings funds linked to a child. For that child it shows “College cost covered”, the share of the college bills the projected balance pays; “Extra monthly to hit target”, the extra monthly contribution that reaches the child's “Savings target”; and “Chance of hitting target”, the share of simulated runs that reach it. “Balance vs cost” draws the projected balance year by year, with a shaded band for the range of simulated outcomes and the college years marked; “Coverage by beneficiary” sets the children side by side, and “Year by year” lists contributions, growth, the college bill and the end balance.

A child's “Savings today” starts from the latest balances of those accounts and funds. The bill for a college year is the “Cost per year, today” grown by “College-cost inflation” and is drawn from the balance at the start of the year, and what remains grows at the “Nominal annual return”. With more than one child, “Beneficiaries” shows one at a time or “Everyone” together.