With the increasing cost of tuition leaving many graduates mired in student debt, more people are opting for tax-advantaged 529 savings plans to help future generations pay for school.
What Exactly Is A 529 Plan?
Grandparents or parents usually establish 529 accounts naming their children or grandchildren as beneficiaries. However, anyone can open a 529 account. There are two main types of 529 plans, 529 Education Savings plans and 529 Prepaid Tuition plans. Today we’ll focus on the 529 Education Savings Plan.
Understanding 529 Education Savings Plans
Education Savings Plans allow for tax-deferred growth in a selected investment (usually a mutual fund), and withdrawals are tax-free when used for eligible education expenses. As with any investment, the value of your account directly reflects the performance of your selected fund. What if the beneficiary opts out of college or gets a full ride? You can simply change the beneficiary, perhaps to a sibling. Also, if the account has been established for 15 years, you can roll over a maximum of $35,000 to a Roth IRA owned by the beneficiary.
“Aside from college tuition, withdrawals from a 529 savings plan can also be used for K–12 tuition.”
How Can My Beneficiary Utilize The Money
Aside from the obvious answer of college tuition, withdrawals from a 529 savings plan can also be used for K–12 tuition. Other related education costs including fees, room and board, and related expenses can also be paid from the plan. And the SECURE Act of 2019 expanded withdrawals to include expenses for registered apprentice programs and up to $10,000 in student loan repayment.
Tax Advantages Of A 529 Plan
Contributions to a 529 plan are not pre-tax, so you will pay federal income tax on the money you’re investing. However, because it’s funded with post-tax dollars, your qualified withdrawals will be free from state and federal taxes. For people looking to reduce their assets or the value of their estate, a 529 could be a good option. Let’s say both grandparents were to set up separate 529 accounts for each grandchild, they would each be able to add $18,000 per year and stay within the gift tax exclusion amount. Furthermore, the 5-year rule allows you to superfund the 529 plans with a lump sum payment spread out over a 5-year period. This would allow the grandparents to reduce their assets by 180,000 (18,000 x 5 = 90,000 x 2 = 180,000) per child.
To find out if a 529 Education Savings Plan fits into your financial planning strategy, reach out to an FRC® trained advisor for more information.
