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JUNE 1, 2018

Can California 529 Plans Offer Tax Advantages?

Answered by
Richard Polimeni
Director, Education Savings Programs
Like 529 plans sponsored by other states, California's state-sponsored 529 plan can offer tax-advantaged savings growth as well as a way to potentially shrink your taxable estate. 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 (use this handy 529 state tax calculator to estimate your specific benefit), and withdrawals for qualified expenses are tax free. (Note that contributions to some states' plans can be state tax-deductible for residents of those states.)
While contributions to these accounts aren't tax-deductible, earnings grow free from state and federal taxes.
As with other 529 plans, for 2018, the California 529 plans allow you to contribute up to $15,000 per year per beneficiary without triggering any federal gift-taxes or using any of your lifetime gift-tax exclusion amount. You may also step up your giving by making five years' worth of contributions per beneficiary — as much as $150,000 for couples electing to split gifts or $75,000 for individuals — in one year. But if you do so, 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.
California's 529 plans are available to any citizen or taxpayer in any state, and as with all 529 plan accounts, you can now make up to $10,000 in withdrawals free of federal tax from them annually. The withdrawals allow a beneficiary to pay for tuition at public, private or religious elementary or secondary schools. You can also make withdrawals free from federal—and possibly state and/or local—income taxes to pay for qualified higher education expenses (with no $10,000 annual withdrawal limit for each beneficiary). Either type of withdrawal can be used for expenses within or outside California.
You can now use up to $10,000 per calendar year per beneficiary in 529 assets to help pay for tuition in connection with enrollment or attendance at an elementary or secondary public, private or religious school.
You can open the account with as little as $25 and name as beneficiary your child, your grandchild, yourself or even someone outside of your family. Once the account balance in a California 529 plan account (or the total of all California accounts for one beneficiary) reaches $475,000, though, you can't make any further contributions — though the account balance can continue to increase after that through investment growth.
As with other 529 plans, withdrawals that pay for qualified expenses such as tuition, fees, books and supplies are not taxed. If you use funds from a California 529 for non-qualified purposes, the withdrawals will be taxed as ordinary income and will be subject to a 10% additional federal tax, as well as a 2.5% additional income tax in California.
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