Did you know that a 529 savings plan is a tax-advantaged investment vehicle designed to encourage saving for the future higher education expenses of a designated beneficiary? There are generally two broad categories of 529 plans: college savings plans and prepaid tuition plans.
Nearly every state has at least one 529 plan available, but you can invest in a 529 plan in almost any state. Be sure to research the options available to find the best fit for you. A 529 plan operates much like a Roth IRA. The contributions are after-tax, and it grows tax-free. Distributions for qualified expenses are not taxed. Qualified expenses include tuition, as well as books, room and board, and even computers. It can be spent on K-12 tuition, graduate or professional school, or even continuing education. Additionally, over 30 states offer full or partial tax deductions on state income tax for 529 plan contributions.
There are no annual contribution limits, and the lifetime contribution limits, which vary by plan, range from $235,000 to $520,000. There are no age or time limits, so they can continue to grow indefinitely, and they can be transferred to another qualifying family member easily. The owner, who contributes the money, maintains control of the account, rather than the beneficiary, so you can make sure that it is used for its intended purpose.
The value of the 529 plan can impact the student’s financial aid. This impacts both the federal aid, as well as, financial aid from universities and colleges directly. Another potential drawback is the 10% withdrawal penalty for non-qualified distributions. This penalty can be waived under certain circumstances, including:
- A beneficiary dies or becomes disabled
- A beneficiary receives a tax-free scholarship
- A beneficiary receives educational assistance through a qualifying employer program
- A beneficiary attends a U.S. Military Academy
- The qualified education expenses were used to generate the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Tax Credit (LLTC)
These distributions are also taxable as income, both federally and sometimes at the state level as well.
To learn more about 529 savings plans and the potential benefits they can bring to your estate plan, please use our office as a resource. We are here to provide you with the answers you need and help you throughout the estate planning process. Contact us today to set up an appointment.