Introduction to 529 Education Savings Plans

Introduction to 529 Education Savings Plans

A 529 Education Savings Plan is a state-sponsored savings program allowing individuals, regardless of their income or state residency, to set aside assets in a tax-deferred account to pay for a student's education. The Schwab 529 Education Savings Plan ("Schwab 529 Plan") is administered by the state of Kansas with American Century Investments® as the program manager.

You can assist your clients in establishing a new account, selecting investment options, and managing changes.

Key features of Schwab 529 Plan:

  • Open to residents of any U.S. state (though the investor's or their beneficiary's resident. state may offer additional state tax benefits for investing in their state's plan). 
  • No gift tax for contributions up to $18,000 ($36,000 per couple).
  • $475,000 contribution limit.
  • No income phaseout limits.
  • Deferral of federal taxes on any earnings growth.
  • No federal tax on withdrawals used for qualified education expenses.
  • Funds can be used for a broad range of education expenses at most accredited colleges and universities, certified apprenticeships, vocational technical schools, K-12 tuition expenses, and even for $10,000 for student loan repayments. 
  • No mandatory distribution age; keep account balance indefinitely.
  • Account owner able to reassign account to another eligible student with no time restriction for making the change.
  • Account owner to maintain control of assets.
  • Minimal impact on financial aid (depending on investor's financial situation).
  • Wide range of available investments tailored to the risk tolerance and age of the beneficiary.
  • No account service or enrollment fee.
  • Available for householding

Key information related to the Schwab 529 Plan:

  • Contributions may be tax-deductible at the state level. Kansas residents can receive an annual adjusted gross income deduction of up to $3,000 ($6,000 if married, filing jointly) per beneficiary. Clients should check with their resident state for rules on tax treatment.
  • If your clients invest in a 529 plan outside of their state of residence, they may lose any state tax benefits offered by their state's plan.
  • Contributions are removed from the account owner's taxable estate even though assets are retained until they are used for education.
  • No minimum initial contribution.
  • Initial contribution can be transferred from a Schwab custodial account, a Schwab One® or Schwab brokerage account, another state 529 plan, or from an education savings account.
  • Advisers may have authority on the 529 account by completing the Schwab 529 Financial Professional Authorization form.

For information regarding Schwab 529 Plan account ownership, beneficiaries, contributions, and more, refer to the following:

Account ownership

Authority over the account is held by the account owner(s). The account owner has the ability to:

  • Make contributions.
  • Request qualified withdrawals to pay for the student's qualified education expenses.
  • Request nonqualified withdrawals.
  • Deny a withdrawal request.
  • Select or change the original beneficiary to an eligible family member of the beneficiary at any time.
  • Change the investment selection (twice per calendar year as authorized by the IRS).
  • Roll the account over to another state-sponsored 529 program.
  • Roll the account over directly to a Roth IRA for the named beneficiary.

Beneficiaries

  • If the 529 account student does not use all the available funds in the account, the account owner can reassign the account to another eligible student or rollover directly to a Roth IRA in the beneficiary’s name. 
  • To avoid taxes and penalties, the new student must be an eligible family member of the original student.
  • Multiple account owners can establish 529 accounts for the same designated student.

Contributions

  • Contributions can be made to a 529 plan and to an education savings account in the same year for the same student. The gift-tax exclusion limit applies to the total contributions made.
  • Once the plan contribution limit has been reached, no additional contributions (including qualified rollovers) can be made. However, the account value can continue to appreciate above this limit.
  • If the account owner makes a contribution to a Schwab 529 Plan account in excess of the plan's contribution limit, they have two options:
    • They can transfer the excess amount to a 529 account of an eligible family member (as long as this does not create an excess contribution to the receiving account).
    • They can withdraw the excess contribution within 30 days of the date in which the contribution occurred.
  • If the excess contribution is not transferred or withdrawn within 30 days, any earnings on the excess amount are taxed with a 10% penalty, in addition to any income tax owed.
  • Clients can transfer assets to another state 529 plan once every 12 months without a change of beneficiary, or whenever they change beneficiaries.
  • Each state plan has its own rules regarding contribution limits, investment choices, and fees.
  • Family and friends can contribute to a 529 account on the Ugift® website with the Ugift code obtained by the account holder.

Withdrawals

  • The minimum withdrawal amount is $50.
  • Qualified withdrawals may include:
    • Room and board expenses for students enrolled in an eligible educational institution at least half-time.
    • Studying abroad programs as long as the program is part of an accredited U.S. post-secondary institution.
    • K-12 tuition expenses, with an annual limit of $10,000 per beneficiary.
    • Costs associated with certified apprenticeships.
    • Payments applied to principal or interest on any qualified education loan of a 529 plan designated beneficiary or their siblings (this amount is subject to a lifetime maximum of $10,000 per beneficiary and sibling).
  • Nonqualified withdrawals may be subject to taxes and a 10% federal penalty tax. If an account owner withdraws more than a student's qualified expenses, the owner has 60 days to rollover excess contributions to another 529 plan.
  • Withdrawal Methods - Clients can make withdrawals:
    • By check, payable to the account owner or beneficiary.
    • Electronically using ACH to the account owner's or beneficiary's bank account.
    • By check payable directly to the eligible educational institution or an approved third party.
    • Directly to participating colleges or schools through an electronic payment.
      • A $10 service fee applies for this fast, secure, and trackable option.

Direct rollover to Roth 

  • Unused 529 assets may be rolled over into a Roth IRA without incurring the usual 10% penalty for nonqualified withdrawals or generating any taxable income. 
  • Limitations:
    • Owned the 529 plan for a minimum of 15 years before executing rollover.
    • Rollover cannot exceed annual Roth contribution limit of $7,000.
    • Lifetime maximum rollover limit of $35,000.
    • Beneficiary of the 529 plan must also be the owner of the Roth IRA and they must have. earned income at least equal to toe amount of the rollover. 

Scholarship and financial aid impact

  • A parent-owned 529 plan is considered a parental asset for purposes of calculating financial aid eligibility. However, only 5.6% of parental assets and income are reflected in the calculation. There is no impact if the account is owned by another relative, such as a grandparent, aunt, or uncle until after such time qualified withdrawals are taken. Qualified withdrawals are considered income for the student.
  • If the account owner is the student, the account is considered their asset.

Tax considerations

  • The earnings portion of a nonqualified withdrawal is taxable to the account owner or beneficiary (at the account owner and beneficiary's tax rate) and is also subject to a 10% federal penalty. Clients should check with their tax advisor for rules on tax treatment.
  • The 529 Federal gift tax generally applies if your client gives someone more than the annual gift-tax exclusion amount, currently $18,000 ($36,000 per couple) during the tax year.
  • For 529 plans, clients may contribute up to $90,000 ($180,000 per couple if married and joint tenants) per student can be contributed gift-tax free in one year if the contribution is prorated over five years (certain conditions apply). Any additional gifts by the account owner to the same student during the five calendar years, beginning with the year in which the deposit was made, is subject to gift tax consequences. Special tax forms may be required.
  • Residents of Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, and Pennsylvania are eligible for an annual gross income deduction for contributions to any state-sponsored 529 plan. Deduction amounts vary by state. Contributions may require special tax forms. Please refer clients to their tax advisor for specific information.
  • An out-of-state student may be taxed by his or her state of residency, rather than by the 529 plan state.

Investment options

See the following table for investment information for the Schwab 529 Plan managed by American Century Investments on behalf of the state of Kansas:

Underlying fundsInvestment choicesFees and expenses
  • American Century Investments
  • Avantis Funds
  • American Beacon Funds
  • Baird Funds
  • JP Morgan Funds
  • Metropolitan West Asset Management
  • Schwab Funds®
  • Vanguard Funds
  • Static or age-based option
  • Actively managed funds or index funds
  • Multiple static portfolios based on varying degrees of risk tolerance
  • Multiple age-based tracks based on risk tolerance and the age of the student
  • No account service or enrollment account maintenance fee (other fees and expenses apply).
  • The total program fee is 0.20% for index portfolios, and ranges from 0.34% - 0.86% for actively managed portfolios, as of August 2023. Fees are subject to change at any time. All account owners are notified of fee changes in a timely manner. 
  • Static portfolios are reallocated annually based on the target asset allocation of the portfolio chosen, for example aggressive or moderate.
  • Age-based portfolios are based on the student's age and automatically become more conservative as the student approaches college age.
  • Actively managed funds provide broad diversification, professional selection of stocks and bonds, and potential to exceed market expectations.
  • Index funds offer clients a cost-effective opportunity to track the performance of major market indices.
  • Clients can change portfolio selections twice per calendar year as authorized by the IRS, or when they change a beneficiary.
  • With limited power of attorney, advisors can access their clients' accounts on Schwab Advisor Center with Ascensus 529 QuickView. Use this site to view account information and transaction history, place online trades and withdrawals, view tax forms and statements.
  • You can also upload 529 account information into client management systems—like Envestnet | TamaracTM PortfolioCenter®, Black Diamond®, or Morningstar OfficeSM—through the data aggregator options available on 529 Quickview or through DST FAN (Financial Advisor Network) Mail®.

Prepaid tuition plan

  • Schwab does not offer 529 prepaid accounts.
  • A 529 prepaid account is a college-savings account that helps protect against rising costs by allowing your client to buy future credits for tuition (and in some cases other college expenses) at current rates. 
  • A 529 prepaid account may not pay the full future cost of college if the student attends a private institution or goes to college outside the state where the plan is based.

Learning Quest

  • Learning Quest 529 Plan accounts are no longer offered by Charles Schwab.
  • Schwab continues to maintain and service existing Learning Quest accounts.
  • Clients who want to open a new 529 education savings plan have two options:
    • Open a new 529 education plan account through Schwab*.
    • Open a new Learning Quest 529 account directly with American Century Investments.

Client communications

Upon opening a Schwab 529 Plan, your client receives the following:

  • A profile confirmation verifying the account information, contact information, and funding instructions. Schwab includes a deposit slip to use with the next account contribution.
  • Schwab 529 Education Savings Plan Guide & Participation Agreement.

Statements and confirmations

  • 529 account statements are generated and distributed by the recordkeeper for the plan. American Century Investments have partnered with Ascensus Government Savings Recordkeeping Services, LLC to provide certain administration and online account management services for the Schwab 529 Plan.
  • Quarterly statements are mailed directly to the client if there is activity in the account for the previous quarter. If there is no activity in the account, no statement is mailed for the first or the third quarter.
  • The client's quarterly statement is available online at schwab.com, regardless of activity.
  • Confirmations are sent when a contribution is made.
  • Confirmations are not sent for automatic monthly investments.

* The Schwab 529 Plan differs materially from the Learning Quest 529 Plan with regard to available portfolios, risks, and expenses.

Review a side-by-side comparison of the goals and advantages of college savings investing accounts and their tax considerations: College savings accounts goals and advantages.

What state administers the Schwab 529 Plan?
The Schwab 529 Education Savings Plan is administered by the state of Kansas with American Century Investments as the program manager. Residents of any state can invest in the Schwab 529 Plan, but your client should consider whether a 529 plan available in your client's state of residence offers state tax advantages not available under the Schwab 529 plan.

Are there fees associated with the Schwab 529 Plan?
There are no account service, enrollment, or account maintenance fees. The total program fee is 0.20% for index portfolios, and ranges from 0.34% - 0.86% for actively management portfolios.

How do I open a 529 account for my client? 
For instructions, see How to open a 529 Education Savings Plan.

What happens if the account owner dies before the 529 funds have been distributed?
If the account owner dies, ownership of the account transfers to the surviving account owner. If there is no surviving account owner, ownership transfers to the successor account owner designated by the account owner, or the designated beneficiary. Refer to the Schwab 529 Education Savings Plan Guide & Participation Agreement for details.

How can my client contribute to a 529 Education Savings Plan?
After opening the account, contributions to a 529 plan can be made a number of ways:

  • Send a check made payable to "Schwab 529 Plan," and mail it to P.O. Box 2906, Shawnee Mission, KS 66201-2906, or overnight to 1001 E 101st Terrace, Suite 2000, Kansas City, MO 64131.
  • Connect the 529 account to an external bank account, such as a Schwab Bank Investor Checking™ account or a Schwab One account, and transfer the funds. (The funds must come from an account owned by the 529 account holder or beneficiary.)
  • Use Schwab MoneyLink® or Schwab BillPay® to make an electronic transfer.
  • Friends and relatives can contribute to a 529 account on the Ugift® website with the Ugift code obtained by the account holder.
  • Call the 529 Team at 888-903-3863 for assistance making a contribution.

Schwab Bank Investor Checking accounts are available only as linked accounts with Schwab One® accounts. The Schwab One brokerage account has no minimum balance requirements, and there is no requirement to fund this account, when it is opened with a linked Investor Checking account.

What investment options are available for my client's 529 account?
Refer to the Investment Options section of the Schwab 529 Education Savings Plan Guide & Participation Agreement for portfolio strategies and specific funds.

How to create a standing letter of authorization
How to open a 529 Education Savings Plan
How to open a trust account
How to set up direct deposits
Introduction to custodial accounts
Introduction to custodial IRAs
Introduction to education savings accounts
Introduction to householding

  • Use the 529 State Tax Calculator to see whether your client's state offers a tax benefit for 529 plans and how much it might be.
  • For more information about the Schwab 529 Plan, see the Schwab 529 Education Savings Plan Guide & Participation Agreement under the forms library in Schwab Advisor Center. Please read carefully before investing.
  • Use Schwab's College Savings Calculator to help your client estimate how much to save for their children's college education.
  • Find detailed, objective information about 529 plans at savingforcollege.com.
  • For more information about and to register with Ascensus 529 QuickView, visit the 529 QuickView site.
  • Call the Schwab 529 Team at 888-903-3863.
  • Contact the DST Team with questions about their websites at 800-435-4112.
  • Your clients can call the Schwab Signature Alliance® Team with questions at 800-515-2157.

Before investing, carefully consider the plan's investment objectives, risks, charges and expenses. This information and more about the plans can be found in the Schwab 529 Education Savings Plan Guide and Participation Agreement available from Charles Schwab & Co., Inc., and should be read carefully before investing.

You may request a Schwab 529 Education Savings Plan Guide and Participation Agreement by calling 888-903-3863 or going to schwab.com/529. If you are not a Kansas taxpayer, consider before investing whether your or the beneficiary's home state offers a 529 plan that provides its taxpayers with state tax and other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available in such state's qualified tuition program. Tax and financial aid treatment of 529 plans is subject to change. As with any investment, it is possible to lose money by investing in this plan.

The Schwab 529 Education Savings Plan is available through Charles Schwab & Co., Inc., and is managed by American Century Investment Management, Inc. The Plan was created by the Kansas State Legislature under the provisions of Section 529 of the Internal Revenue code and is administered by Kansas State Treasurer. Managed by American Century Investment Management. Inc. Notice: Accounts established under the Schwab 529 Plan and their earnings are neither insured nor guaranteed by the State of Kansas, the Kansas State Treasurer, American Century Investments or Charles Schwab & Co., Inc. Accounts established under the Schwab 529 Plan are domiciled at American Century Investments and not at Schwab.

American Century Investments has partnered with Ascensus Government Savings Recordkeeping Services, LLC ("Ascensus") to provide certain administration and online account management services for the Plan. 

This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, you should consult with a qualified tax advisor, CPA, Financial Planner or Investment Manager.

American Century Investments receives remuneration from fund companies, including American Beacon Advisors, Metropolitan West Asset Management, LLC, and JP Morgan Funds for recordkeeping, shareholder services, and other administrative services associated with funds held in the Schwab 529 Education Savings Plan portfolios.

Charles Schwab & Co., Inc. and American Century Investments are separate and unaffiliated companies.

529 QuickView® is a registered service mark of Ascensus Broker Dealer Services, Inc.

Third parties are solely responsible for the information and services available through their websites. The accompanying listings are not and should not be construed as recommendations, endorsements, or sponsorships by Schwab of any of the firms (or organizations) listed or of their goods and services.

The third party firms mentioned are not affiliated with nor employed by Charles Schwab & Co. Inc. Their mention is not, and should not be construed as a recommendation, endorsement or sponsorship by Schwab.

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Charles Schwab Investment Management, Inc. dba Schwab Asset Management is the investment advisor for Schwab Funds. Charles Schwab & Co., Inc. (Schwab) Member SIPC, is the distributor for Schwab Funds. Schwab Asset Management and Schwab are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation.

Schwab Asset Management receive compensation from the Schwab Funds for providing investment advisory services, as well as shareholder and other fund services. The amount of such compensation is disclosed in the prospectus for each fund. The aggregate fees that Schwab or CSIM receives from Schwab Funds are generally greater than the remuneration Schwab receives from nonaffiliated mutual funds.

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