529 Plans – What Are They and How Can They Become a Part of Your Comprehensive Financial Plan?
As college costs continue to increase each year, saving early has become increasingly critical to building a sound financial plan. Waverly Advisor’s Director of Financial Planning and Senior Client Consultant, David Foreman, CFP®, offers perspective on how you can take advantage of a 529 account as part of your comprehensive financial plan.
What is a 529 Plan?
A 529 plan is an education savings plan that is designed to help families set aside funds for future education expenses. With a 529 plan, an investor can ultimately use the full value of the account at public or private colleges and universities nationwide and, in some cases, internationally.
Are There Tax Benefits from a 529 Plan?
Yes—the main advantage of the 529 savings vehicle lies in the tax treatment of the plans.
- The earnings from investments are not taxed, allowing the money to grow more quickly.
- And if withdrawals from the account are used for qualified expenses, such as tuition, books, room and board or computers, the earnings are currently free from federal taxation.
Some Reasons Why We Recommend You Consider Utilizing a 529 Plan:
- The tax-free growth can prove to be very beneficial over a number of years. Consider the compounded growth potential if savings begin at a child’s early age and grow with no taxes for 15+ years!
- As mentioned above, all funds are federally tax-exempt if they are used for qualified expenses. Even if the student lives off campus, most expenses typically qualify.
- Many states do not assess state tax on the earnings either, and even offer a tax deduction on contributions to that respective state’s plan. Just carefully review your state’s provisions when selecting a plan to help you make the best choice for you and your family.
- These plans can be great vehicles for passing wealth to the next generation in order to limit potential estate taxes.
- Grandparents also often enjoy contributing to 529 plans because they can transfer funds in an impactful manner and in a way that often is preferable to giving cash. In fact, a grandparent can be the owner of a 529 account, which means they would remain in control of the funds.
How Can You Spend Excess Money You Might Save in a 529 Plan?
As financial advisors, we hear this question often from our clients. It is helpful to know that if a child has funds remaining in a 529 account when they finish school, those funds can be transferred to certain family members with no negative consequences (i.e., taxes or fees). For example, funds can be moved to the 529 account of a younger brother or sister or other qualifying family member. Or, if a child receives a scholarship, funds can be withdrawn with no penalty, though the earnings would be taxable income.
Are There Contribution Limits to a 529 Plan?
An important consideration for investors is the amount of contributions and the impact of federal gift tax laws. You can contribute up to $15,000 ($30,000 for a married couple) per year to each child’s plan. Alternatively, an individual can make five years’ worth of gifts in one year, which amounts to $75,000 per child or $150,000 for a married couple. However, no other gifts can be made to the child during this 5-year period in excess of those limits without gift tax consequences. We recommend you seek advice from your financial advisor if you have questions about contribution limits for your 529 plan.
Notable and Recent Changes to 529 Plans
K-12 Private School Tuition
Before 2018, 529 funds were only for qualified higher education expenses. Now, 529 funds can be used for K-12 private school tuition as well. The maximum that can be withdrawn for K-12 private school tuition per beneficiary is $10,000 per year. If you foresee children or grandchildren attending private K-12 school, carefully consider this savings vehicle. The funds potentially can grow tax-deferred for several years before being withdrawn. If not needed for K-12 private school tuition, the funds would still be available for college expenses.
529 ABLE Plans
529 ABLE accounts are a relatively new savings option administered in many states and allow individuals who are living with disabilities to save tax-deferred money for higher education and qualified disability expenses. Some characteristics of 529 ABLE accounts include:
- Funds can be withdrawn tax-free when they are used for qualified disability expenses.
- Contributions are limited to a total of $15,000 per year per beneficiary. This may require coordination among family members if multiple people contribute to a 529 ABLE account.
- If the fund balance exceeds $100,000, the beneficiary will no longer be eligible to receive SSI benefits.
- A portion of funds in a 529 education savings plan can be rolled into a 529 ABLE account in the event the beneficiary is later diagnosed with a disability.
If you have questions about 529 Plans or would like more information, click here to get in touch with David Foreman.