Many of our clients are at a stage of life where they are thinking about how to help children, or more often grandchildren, with the cost of higher education.
While there are a variety of ways to do this, one of the most popular tools is through a savings-vehicle called a 529 Plan.
A 529 Plan is a state-sponsored program that allows most anyone (parents, relatives, friends), to put money away for future education expenses. More than a regular savings account, these programs have some pretty great benefits, such as:
- Once assets are deposited to a 529 Plan, they are invested (each custodian has its own set of approved investment choices), and the account grows tax-free. You do not get a deduction on your Federal taxes (although some States give tax breaks on deductions), but the contributions you make are now excluded from your taxable estate.
- If assets are withdrawn for education expenses, withdrawals are also tax-free (check out what the Saving for College website has to say about what qualifies for education expenses: 529 Qualified Expenses)
- You can contribute your annual gift tax exclusion amount to a 529 Plan each year (for 2024, that’s $18,000), or, you can make a lump-sum contribution of up to 5 years’ worth of contributions at once (if you do the lump-sum contribution, you may not make any additional contributions for that person for 5 years).
- You can change beneficiaries of a 529 Plan – if one child or grandchild ends up not needing the funds, you can change the beneficiary to another family member, including yourself.
- Funds can stay in the account indefinitely – as long as there is a living beneficiary. This means that funds can be used for education even if the beneficiary goes back to school at the age of 60, let’s say!
- New with the passage of Secure Act 2.0 in 2022, up to $35,000 of leftover funds in a 529 Plan can be rolled over tax and penalty free to a Roth IRA for the beneficiary (some other limits apply here – including how long the 529 Plan has been open, and annual Roth IRA contribution limits).
- Many additional resources are available if you’d like to find out more about 529 Plans, including a great summary from Schwab, available here: Saving for College: 529 College Savings Plans
Although advisors (like us) are not allowed to manage 529 Plans, we can help you think through whether or not such an account would be beneficial for you or a member of your family.
We can also help you plan contributions – when to make them (does it matter?), how much to make (how will contributions impact the success of your own financial plan?), and where to make them (is one State sponsor better than another?).
Topics like this, and many others, are all part of what Real Planning for Real Life™ looks like.
Call our office at (480) 924-5613 to find out more!
