529 Plan (Part I) - The Basics of the 529 Plan for Education Savings
By Maura Schauss, CFP®
Have you heard? Right now, Americans owe over $1.5 trillion in student debt. Studies have found that this debt burden is not only preventing young people from financial moves like saving for retirement or buying a home or car, but it is causing them to delay marriage, parenthood, and entrepreneurship as well.
It can be empowering to take actions right in your own home to set the right course for your family’s education savings. You can start saving for your own kids’ education so that they do not end up saddled with spirit-crushing debt along with their diploma.
Every year on the 29th of May, we take some time to talk about the 529 Plan, named for Section 529 of the Internal Revenue Code which establishes one of the best ways for you to save for college.
What Is A 529 College Savings Plan?
A 529 Plan is a way to save for educational expenses. The government provides tax benefits as an incentive for people to use them. Also called qualified tuition plans, they enable people to save and invest for college through either prepaid tuition plans or college savings plans.
How Does A 529 College Savings Plan Work?
Though they offer tax incentives, the Federal Government doesn’t actually sponsor or run 529 Plans. Rather, the states do. Every single state and the District of Columbia offer at least one kind of 529 Plan in addition to a group of private colleges and universities.
Even though they are sponsored by specific states, their access and use are not limited by their sponsorship. No matter which state you live in, you can make use of any state’s plan. Also, neither the state you live in nor the state that sponsors your plan affects where you can use the funds. You can live in Maryland, invest in the Utah 529 Plan, and go to school in Pennsylvania. Funds from 529 Plans can be used in over 6,000 U.S. colleges and universities and 400 foreign ones.
While you can use the funds in any state, some states offer a 529 ‘pre-paid’ tuition program to their residents that allow you to lock in tuition rates at state schools. This program is generally most appropriate for kids who plan to go to a state school.
Unlike other tax-advantaged saving plans, anyone can take advantage of a 529 Plan regardless of their income. Also, there is no annual contribution limit. There are maximum aggregate limits which vary by plan, from $235,000 to $529,000.
Why Would I Want A 529 College Savings Plan?
A 529 Plan offers tax benefits. Earnings accumulate tax-deferred and distributions are not subject to federal tax when used for qualified expenses. Many states may offer tax incentives as well as deductions or credits.
These plans also may offer a benefit of tax gift averaging. The gift tax exclusion for 2019 is $15,000. With a 529 Plan, you can do 5 years’ worth of giving in one year and have it count as if it was given over a 5-year period. Called gift tax averaging, instead of giving $15,000 a year for 5 years, you can put $75,000 directly into a 529 without any gift tax consequences (as long as you don’t contribute any more for 5 years). This is a great benefit to explore in your estate planning process.
How Did The Tax Reform Bill Affect 529 College Savings Plans?
The Tax Cuts & Jobs Act of 2017 expanded the usage of 529 Plans. Previously, they could only be used to save for higher-education expenses. Now, they can be used for K-12 expenses as well. Up to $10,000 a year can be withdrawn tax-free to cover tuition expenses at public, private, and religious K-12 schools.
The tax reform bill also opened the door for 529 Plans to be rolled over into 529(a) “Able” accounts for the same beneficiary or a member of the beneficiary’s family. Such rollovers are still subject to the annual 529(a) contribution limit of $15,000 for 2019.
When Can I Open A 529 College Savings Plan?
There is no open enrollment period for 529 Plans, so you can open one at any time. There is also no limit to the age of the beneficiary of the account. You can open one for your newborn, your college graduate who’s thinking of getting a master’s degree, or your mother, who always wanted to finish her degree. And as with any savings plan, the best time to start is NOW!
It is important to save for college for your children in order to give them the best possible start to a financially stable adulthood. However, how you save can make a difference of thousands of dollars by the time tuition is due. Opening a 529 Plan is a great first step, but you also need to make sure that the funds within that 529 Plan are invested properly for your own personal needs and risk tolerance.
If you’re interested in starting to save for college, we can help you open an account and figure out the best way to invest within the account to optimize the final results. Call our office at 703.584.2700 or email firstname.lastname@example.org.
About Washington Wealth Advisors
Washington Wealth Advisors is an independent registered investment advisory firm serving high net worth families and small businesses. We focus on holistic financial planning and comprehensive investment management. Leveraging our core strengths of unbiased, active investment management together with a detailed annual financial planning capability, we serve your comprehensive investment and financial planning needs.