529 Plan Tax Incentives

Regardless of your income or tax bracket, you can take advantage of the federal and state tax incentives offered by 529 plans.

Over time, tax-advantaged accounts such as 529 accounts may outperform similar investments in a taxable savings account. As you can see from the example below, it would take some pretty impressive returns to outpace the tax-free growth of a 529 plan.

Tax-free Growth and Withdrawal

Assets invested in a 529 plan grow federal and state tax free for the life of the account. In addition, you can withdraw the money federal and state tax free, as long as it’s used to pay for qualified higher education expenses.

If the money is used for other purposes, the earnings portion of the withdrawal is subject to ordinary federal income tax and any applicable state income tax, including recapture in certain circumstances, and an additional 10% federal tax.

The Benefits of Tax-free Growth

This hypothetical illustration assumes an initial investment of $10,000 and an 5% annual rate of return. The taxable account assumes a 28% federal and 5% state tax rate. The illustration does not represent the performance of any specific account or investment and does not reflect any plan fees or charges that may apply. If such fees or charges were taken into account, returns would have been lower.

Gift and Estate Tax Planning Benefits

In recognition of the importance of saving for higher education costs, 529 Plans qualify for special gift tax exclusion. You can contribute up to $14,000 ($28,000 for married couples) annually per beneficiary, or up to $70,000 ($140,000 for married couples) prorated over a five-year period—without taxes.1

Additional State Tax Incentives for Residents

Investors should consider before investing whether their or their designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program and should consult their tax advisor.

Under The Education Plan, New Mexico residents can deduct their plan contributions from their New Mexico state taxable income. Certain restrictions apply.

Penalty Free Withdrawals

Funds may be withdrawn without penalty if the beneficiary receives a scholarship (withdrawals can be made up to the scholarship amount), or in the event of the death or disability of the beneficiary. Ordinary federal and state income taxes would be owed on any investment earnings included in gross income.

1. If the ACCOUNT OWNER utilizes the special five-year lump sum exclusion and dies within five years of the funding date, the portion of the contribution allocable to the years remaining in the five-year period (beginning with the year after the ACCOUNT OWNER’S death) would be included in the ACCOUNT OWNER’S estate for federal estate tax purposes. Clients should consult their tax advisor.

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This material is provided for general and educational purposes only, and is not intended to provide legal, tax or investment advice, or for use to avoid penalties that may be imposed under U.S. federal tax laws. Contact your attorney or other advisor regarding your specific legal, investment or tax situation.

The Education Plan® is operated as a qualified tuition program offered by The Education Trust Board of New Mexico and is available to all U.S. residents. OFI Private Investments Inc., a subsidiary of OppenheimerFunds, Inc., is the program manager for The Education Plan and OppenheimerFunds Distributor, Inc. is the distributor of The Education Plan. Some states offer favorable tax treatment to their residents only if they invest in the state's own plan. Investors should consider before investing whether their or their designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program, such as financial aid, scholarship funds, and protection from creditors, and should consult their tax advisor. These securities are neither FDIC insured nor guaranteed and may lose value.

Before investing in the Plan, investors should carefully consider the investment objectives, risks, charges and expenses associated with municipal fund securities. The Plan Description and Participation Agreement contain this and other information about the Plan, and may be obtained by visiting www.theeducationplan.com or calling 1.877.EdPlan8. Investors should read these documents carefully before investing.

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