The California 529 plan, also known as the ScholarShare 529 College Savings Plan, is a tax-advantaged savings plan designed to help families save for higher education expenses. The plan offers numerous tax benefits, including state tax deductions, federal tax-free growth, and tax-free withdrawals for qualified education expenses. To maximize these benefits, it's essential to understand the California 529 rules and regulations. Here are 10 key rules to consider:
Understanding the California 529 Plan
The California 529 plan is sponsored by the State of California and managed by TIAA-CREF Tuition Financing, Inc. The plan allows contributions of up to $400,000 per beneficiary, and earnings grow tax-free. Withdrawals are tax-free if used for qualified higher education expenses, such as tuition, fees, room, and board at accredited colleges, universities, and vocational schools.
Eligibility and Contributions
To be eligible for the California 529 plan, the account owner or beneficiary must be a U.S. citizen or resident alien, and the beneficiary must be a future student. Contributions can be made by anyone, including parents, grandparents, and other relatives or friends. The minimum contribution is $25, and there are no income limits or restrictions on the number of accounts that can be opened.
| Contribution Limits | Annual Limit | Lifetime Limit |
|---|---|---|
| Contributions | No annual limit | $400,000 per beneficiary |
It's essential to note that contributions to a California 529 plan are not deductible for federal tax purposes. However, the plan offers a state tax deduction for California residents, which can help reduce state taxable income.
Tax Benefits and Withdrawal Rules
The California 529 plan offers tax-free growth and withdrawals for qualified education expenses. To qualify for tax-free withdrawals, the beneficiary must use the funds for qualified higher education expenses, such as:
- Tuition and fees at accredited colleges, universities, and vocational schools
- Room and board at accredited colleges and universities
- Books, supplies, and equipment required for coursework
- Computers, software, and internet access required for coursework
If withdrawals are used for non-qualified expenses, the earnings portion of the withdrawal will be subject to federal income tax and a 10% penalty. However, the penalty may be waived if the beneficiary receives a scholarship, attends a U.S. Military Academy, or dies or becomes disabled.
Qualified Education Expenses
Qualified education expenses include tuition, fees, and other related expenses required for attendance at an eligible educational institution. Eligible institutions include:
- Accredited colleges and universities
- Vocational schools and technical schools
- Community colleges and junior colleges
- Online and distance learning programs
It's essential to note that qualified education expenses do not include:
- Student loan payments
- Health insurance premiums
- Transportation and travel expenses
- Personal expenses, such as food and entertainment
Investment Options and Fees
The California 529 plan offers a range of investment options, including:
- Age-based portfolios
- Static portfolios
- Individual fund options
Each investment option has its own fees and expenses, which can range from 0.10% to 0.50% per year. It's essential to review the fees and expenses associated with each investment option before making a decision.
| Investment Option | Fees and Expenses |
|---|---|
| Age-based portfolios | 0.10% - 0.30% per year |
| Static portfolios | 0.10% - 0.30% per year |
| Individual fund options | 0.10% - 0.50% per year |
The California 529 plan also offers a range of tools and resources to help account owners and beneficiaries make informed investment decisions, including online account management, investment guides, and customer support.
What is the California 529 plan?
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The California 529 plan is a tax-advantaged savings plan designed to help families save for higher education expenses. The plan offers numerous tax benefits, including state tax deductions, federal tax-free growth, and tax-free withdrawals for qualified education expenses.
Who is eligible for the California 529 plan?
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To be eligible for the California 529 plan, the account owner or beneficiary must be a U.S. citizen or resident alien, and the beneficiary must be a future student. Contributions can be made by anyone, including parents, grandparents, and other relatives or friends.
What are the tax benefits of the California 529 plan?
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The California 529 plan offers tax-free growth and withdrawals for qualified education expenses. California residents can also deduct contributions to a California 529 plan from their state taxable income, up to a certain limit. For the 2022 tax year, the deduction limit is 10,000 for joint filers and 5,000 for single filers.
