Should you consider a 529 Plan?

Billy Peterson, President

You’ve been saving money your whole life and have always set aside funds for purchases before you make them. Now it’s time to consider how to maximize those savings when it comes to planning a college education for your children or grandchildren. It doesn’t matter if you’re a newlywed or if you’re a brand new grandparent, the education savings plan better known as a 529, has benefits for you.

  • Tax-deferred earnings – the earnings in a 529 plan accumulate free of federal and state income tax. This will translate into more value going toward the intended goal rather than carving some out each year for Uncle Sam.
  • Tax-free withdrawals – even when you begin taking withdrawals for the beneficiary’s higher education expenses you will owe no federal or state income tax. In order for this to happen the withdrawals must be considered “qualified”. Qualified withdrawals cover expenses such as tuition, mandatory fees, computers and peripheral equipment, educational software, internet access, books, supplies, required equipment, and room and board for students enrolled at least half time. Sports and entertainment expenses in addition to travel and transportation expenses are not considered qualified. Please note, there is a 10% penalty if the funds are not used for qualified education expenses.
  • Who can open an account? – Anyone at least 18 who has a valid U.S. Social Security number and a physical address. Also, anyone can contribute to the account. This makes a very nice option for aunts, uncles, grandparents and even family friends to contribute toward a child’s education.
  • State tax credits – up to certain limitations, individuals can receive state income tax credits if they open an account with their state sponsored education savings plan. See your financial or tax advisor for details.
  • Investment choices – 529 plans have a number of investment options tailored to fit your risk tolerance and time horizon. Most offer an age band selection which gradually shifts the account into more conservative investments as the student’s age increases, therefore decreasing risk as distributions grow near.
  • Changing a beneficiary – What happens if your named beneficiary decides not to go to college? Or what if there are unused funds remaining in the account after their education is complete? There are several options to avoid incurring the 10% IRS penalty on the earnings. Consider changing the beneficiary to another family member. Beneficiary changes within the family are unlimited. Alternatively, the account can remain intact and the beneficiary can utilize the funds down the road in pursuit of an advanced degree perhaps. Certain changes in beneficiary may result in a taxable event.
  • Gift tax benefits – Those seeking to remove assets from their estate can contribute up to 5 years of allowable annual gifts in advance. This translates into a $70,000 lump-sum for individuals or $140,000 for married couples. Tax laws and provisions may change at any time. Death of the contributor prior to the end of the five-year period may result in a portion of the contribution to be included in the contributor’s estate. Please consult a qualified tax professional to discuss tax matters. Figures apply to tax year 2017.
  • Estate tax benefits – As noted above, reducing an estate can be a huge priority for those trying to avoid paying 40% tax on estate values above the lifetime exemption. Every dollar contributed to a 529 plan falls outside of the taxable estate and thus helps to avoid estate tax.

You should discuss any tax or legal matters with the appropriate professional. Rules and laws governing 529 plans are varied and subject to change. There is a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Before investing, it is important to consider whether the investor’s or 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. Investors should consult a tax advisor about any state tax considerations of an investment in a 529 plan before investing

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