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? ›
While contributions to 529 accounts aren't tax deductible, earnings grow free from state and federal taxes. Since California doesn't provide a tax deduction for contributions to 529 accounts, California residents can invest in any state's 529 plan and still benefit from potential tax-advantage growth.
Does California offer tax benefits for 529? ›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.
What state has the best 529 tax benefits? ›Pennsylvania and Colorado are by far the most generous, as they offer the highest deduction limits of $36,000 and $34,000, respectively, per beneficiary.
Does California match 529 contributions? ›ScholarShare 529, California's college savings plan, is offering a matching grant to help families make the most of their college savings. Eligible families, who apply online and open a new ScholarShare 529 account between February 1, 2020 and December 31, 2020, will receive a dollar-for-dollar match up to $200!
What is the tax advantage of a 529 plan? ›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.
What is the maximum annual contribution to a 529 plan in 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.
Does it matter what state your 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.)
Who offers 529 plans in California? ›California's college savings plan is called ScholarShare 529. It's an investment account that gives you tax advantages when you use it for qualified higher education expenses. By linking your CalKIDS account with a new or existing ScholarShare 529 account, you can watch your college savings grow in one place.
Can California 529 be used in other states? ›Your contributions will always be yours, and you do not need to be a resident of California to open, contribute to or use a ScholarShare 529. Your ScholarShare 529 can also be used for a range of qualified expenses in state, out of state and abroad.
Why choose an out of state 529 plan? ›When the child is young, investing in a low-fee 529 plan from another state may be better, even if your own state provides a state income tax break on contributions. When the child enters high school, the state income tax deductions and tax credits may be worth more than the lower fees on an out-of-state 529 plan.
Does California offer up to $225 to open college fund for a child? ›
SACRAMENTO, Calif., Feb 1, 2022 –ScholarShare 529, California's official college savings plan, is making it easier for eligible families to start saving for college by offering a grant of up to $225 if they open a college savings account and contribute regularly.
What is the downside of 529 accounts? ›If you use distributions from your 529 account to cover anything other than education costs, you will face a penalty. You will be able to withdraw your money from the account but will be responsible for income taxes on the earnings – federal, state, and county if applicable – as well as a 10% penalty fee.
Does Fidelity have a 529 plan in California? ›Open to anyone, regardless of state of residence. of Fidelity's 112 investor center locations nationwide or 22 in California including San Diego, Los Angeles and San Francisco, California. 1 Federal tax law does not allow you to purchase individual securities or mutual funds in your 529 account.
Are 529 plans worth it in California? ›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.
Does California give a tax deduction for 529 plans? ›Cons. California does not allow residents to deduct 529 plan contributions on their taxes. You can't use the California 529 plan to pay for K-12 education expenses.
Does CA allow 529 withdrawals for K-12? ›Up to $10,000 annually can be used toward K-12 tuition (per student). In addition, your 529 can be used for student loan repayment up to a $10,000 lifetime limit per individual. Review a list of qualifying expenses and the state tax treatment of withdrawals for these expenses in the Plan Description.
How do 529 plans avoid taxes? ›Tax advantages
Even better, withdrawals are tax-free as long as you use the money to pay for qualified education expenses, which typically include tuition, books, school supplies and room and board. Because contributions to a 529 are made after-tax, they're not federally tax deductible.
California allows for itemized deductions as follows: Medical and dental expenses. Mortgage interest on home purchases up to $1,000,000. Job expenses and certain miscellaneous expenses.
What happens to 529 when a child turns 18? ›Once the account owner/beneficiary becomes an adult, they assume control over the 529 plan. With an individual 529 plan, the owner is usually a parent or other adult who saves money on behalf of a chosen beneficiary, typically their child.
How to set up a 529 plan in California? ›- Choose a 529 plan. California has only one 529 plan, called ScholarShare. ...
- Determine the type of 529 plan account. ...
- Complete the 529 plan application. ...
- Fund the 529 plan. ...
- Choose investments for the 529 plan.