Merrill A Bank of America Company Merrill A Bank of America Company Open an account Login Open Menu bar Find answers to common questions at MerrillSchedule an Open an accountwith Merrill Helpful resources Related questions Help Open an account Ask Merrill Answers to your investing and personal financequestions COLLEGE SEPTEMBER 8, 2022 Answered by Richard Polimeni Like 529 plans sponsored by other states, California's state-sponsored 529 plan can offer tax-advantaged growth as well as a way to potentially shrink your estate for federal tax purposes. While contributions to California's plan are not deductible at the state or federal level, all investment growth is free from state and federal taxes, and the earnings portion of withdrawals used for qualified education expenses are federal and California state income tax-free. (Note that contributions to some states' plans can be state tax-deductible for residents of those states.) While contributions to 529 accounts aren't tax-deductible, earnings grow free from state and federal taxes. As with other 529 plans, the California 529 plan allows individuals to contribute up to a certain amount per year per account without triggering any federal gift taxes or using any of your lifetime gift tax exclusion amount. You also may step up your giving by making five years' worth of contributions per beneficiary in one year. But, if you do, you won't be able to make additional annual tax-free gifts to the beneficiary for five years unless the gift-tax exclusion amount increases during that time or you use some of your lifetime gift tax exemption. To learn more, refer to the Annual Limits Guide (PDF). California's 529 plan is available to any citizen or taxpayer in any state but if you are not a California resident, you should consider whether your home state offers state tax benefits for investing in that plan. You can make withdrawals free from federal — and possibly state and/or local — income taxes to pay for qualified higher education expenses for the beneficiary. As with all 529 plans, the earnings portion of withdrawals that pay for the beneficiary's qualified expenses like tuition, fees, books and supplies is not taxed. Additionally, you can make up to $10,000 in withdrawals per year, per beneficiary, and free from federal tax when used to pay for tuition at the beneficiary's eligible public, private or religious elementary or secondary schools. State tax treatment of withdrawals for primary or secondary education varies by state. (There is no $10,000 annual limit for other qualified higher education expenses.) Withdrawals can be used for eligible education expenses within or outsideCalifornia. If you use funds from a California 529 plan account for non-qualified purposes, the earnings portion of withdrawals will be taxed as ordinary income and may be subject to a 10% additional federal tax, as well as a 2.5% additional income tax in California. You can open a California 529 plan account and name as beneficiary your child, your grandchild, yourself or even someone outside your family. Once the account balance in a California 529 plan account (or the total of all California accounts for one beneficiary) reaches $529,000, you can't make any further contributions — though the account balance can continue to increase thereafter through investment growth. Tool 529 plan state tax calculator> Article 5 things you may not know about 529 college savingsplans> Solution Open a 529 account> Ready to get started? Call us 888.637.3343888.637.3343 Find a local MerrillFinancial Solutions Advisor Open a 529 account Footnote Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions. Footnote Before you invest in a Section 529 plan, request the plan's official statement from your Merrill Financial Solutions Advisor and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the plan, which you should carefully consider before investing. You should also consider whether your home state or your designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds and protection from creditors that are available only for investments in such state's 529 plan. Section 529 plans are not guaranteed by any state or federal agency. MAP4927986-09292023 Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets. Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions. This material is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy. Merrill offers a broad range of brokerage, investment advisory (including financial planning) and other services. Additional information is available in our Client Relationship Summary (PDF). 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FAQs
Can California 529 Plans Offer Tax Advantages? ›
State tax benefits for California residents: While California does not provide a state income tax deduction for contributions to a 529 plan, the earnings within the plan still grow tax-deferred at the federal level. This tax-deferred growth can be beneficial when used for qualified education expenses.
Is 529 tax-advantaged in California? ›Tax-advantaged growth potential
ScholarShare 529 provides tax benefits for California families saving for college. Any earnings are tax-deferred, and withdrawals are tax-free when used for qualified higher education expenses.
California's plan, ScholarShare 529
California's ScholarShare 529 is available to residents of any state, and it includes funds from TIAA-CREF, Vanguard, T. Rowe Price and others. The plan offers a wide variety of age-based funds and other portfolios, and provides many passive funds at low costs.
Those states are Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming. California, Hawaii and Kentucky do not offer any type of 529 tax deduction but do assess income tax. This table breaks down the 529 tax deduction by state.
Does it matter what state my 529 plan is in? ›529 plans are state-sponsored, but you can pick a plan from any state. Most states offer at least one 529 plan. You don't have to invest in your own state's plan, but many states offer residents a state tax deduction for doing so. (There is no federal tax deduction for 529 contributions.)
How does California treat 529 plans? ›California has one of the highest limits in the country for how much money you can save in a 529 plan. Fittingly, you can contribute up to $529,000 in total to California's 529 plan. You can use the California 529 to pay for college expenses in any state. Qualified withdrawals from a 529 plan are tax-exempt.
Does California have a state 529 plan? ›The ScholarShare Investment Board sets investment policies and oversees all activities of ScholarShare 529, the state's 529 college investment plan. The program enables Californians to save for college by putting money in tax-advantaged investments.
Is there a better alternative to a 529 plan? ›Some 529 alternatives include using a custodial account, Roth IRA or Coverdell Education Savings Account.
What happens to 529 if you move states? ›Can I roll over my existing 529 account to another state's 529 plan without penalty? Yes. You can do a rollover (without changing the designated beneficiary) once every 12 months without incurring a penalty.
Does a 529 reduce your taxable income? ›If you use funds from a California 529 plan account for non-qualified purposes, the earnings portion of withdrawals will be taxed as ordinary income and may be subject to a 10% additional federal tax, as well as a 2.5% additional income tax in California.
How do 529 plans avoid taxes? ›
Tax-free withdrawals for qualified expenses: When you withdraw money from the California 529 plan to pay for qualified education expenses, including tuition, room and board, books and supplies, those withdrawals are entirely tax-free at both the federal and state levels.
How much does 529 reduce taxable income? ›Contributions to a 529 plan are not eligible for federal income tax deductions. However, the earnings in a 529 plan grow tax-deferred and are not taxed upon withdrawal when used to pay for qualified education expenses, including college costs.
Can I convert my 529 to a Roth IRA? ›As of January 1, 2024, owners of 529 plan accounts can make tax and penalty-free rollovers to Roth IRA retirement plan accounts, subject to certain limitations. This has been welcome news to many families who worried about having unused or leftover funds in a 529 plan account.
Does California tax 529 distributions for K-12? ›However, you may be subject to state income tax on the earnings portion, and any income tax deductions or credits claimed may be subject to recapture. California also imposes a 2.5% state penalty tax on the earnings portion of non-qualified withdrawals, which includes distributions used to pay for K-12 tuition.
Why choose an out of state 529 plan? ›Sometimes, it makes sense to use an out-of-state 529 plan, even if it means you'll miss out on a state tax benefits. Low fees are a more important criterion for families with young children than state income tax savings when selecting a 529 plan.
Does contributing to 529 reduce taxable income? ›529 Plans Offer Unsurpassed Income Tax Breaks.
Contributions to a 529 plan are not eligible for federal income tax deductions. However, the earnings in a 529 plan grow tax-deferred and are not taxed upon withdrawal when used to pay for qualified education expenses, including college costs.
Tax-Deferred Growth — Contributions grow free of federal and state income taxes while in the account. Tax-Free 529 Withdrawals — No income tax is paid on the growth of your account when withdrawals are used for qualified expenses. State Tax Deduction — Deduct your contributions from your taxable income.
How much can you put in a 529 per year California? ›There are no annual contribution limits for California 529 plans, other than the annual gift tax exclusion and 5-year gift-tax averaging. California 529 plans have a high cumulative contribution limit of $529,000 per beneficiary.
Are 529 contributions tax advantaged? ›Tax advantages
Contributions to a 529 are after-tax and not federally tax deductible. However, if you invest in your own state's 529 plan or if your state is a "tax parity state," you may benefit from state income tax deductions on contributions or state tax exemptions on withdrawals.