May 29th is a Nationwide Celebration of 529 Day
The CFP® Team at Washington Wealth Advisors
May 29th marks the nationwide celebration of 529 Day, an opportunity to highlight the many benefits of 529 college savings plans.
As higher education costs continue to soar, many parents find themselves faced with the nagging question, “Will I have enough money to pay for my child’s college education?” One often overlooked savings option is a state-sponsored 529 plan.
These plans offer great tax benefits, while allowing you to contribute substantially higher sums than other savings alternatives.
529 Plans Types
1. Prepaid tuition programs
This form allows participants to lock in tuition rates at eligible state colleges or universities with a lump-sum investment or monthly installment payments. In some states, a portion of the contract value may also be applied to private or out-of-state schools.
To note, Virginians have excellent options to save for college by using Virginia529 plans. In 2021, Virginia529 created a new option for saving - called the “Tuition Track” - which can remove some additional uncertainty from the process. Learn more about Virginia529 “Tuition Track” option to see how it works.
2. College savings programs
This forms allows contributions to vary. The full value of the account can be applied at any accredited institution of higher education nationwide. Since 529 plans operate under individual state laws, costs and details vary by state.
Substantial Contributions Allowed
Some states allow you to set aside over $500,000 per beneficiary (with no income limitations or age restrictions), compared to $2,000 annually per beneficiary for a Coverdell Education Savings Account (formerly known as an education IRA).
Although contributions are not deductible, earnings in a 529 plan grow federal tax-free and are not taxed when the money is taken out to pay for college. Often times, the 529 account must be open for at least 12 months before any money can be withdrawn, so read the fine print.
Further, various states may also offer their own tax breaks - if you contribute to your own state’s 529 plan you may receive a state tax deduction on a portion of your contribution. Be sure to know the details of your particular plan.
Special Estate Planning Features
One unique feature of 529 plans is that they allow you to move up to $15,000 out of your estate ($30,000 per couple) annually.
Another unique feature of 529 Plans is that you can make a lump-sum contribution to a 529 plan of up to five times the annual gift tax exclusion ($80,000 in 2022), elect to spread the gift evenly over five years, and completely avoid federal gift tax, provided no other gifts are made to the same beneficiary during the five-year period.
The donor generally retains control of the account and may be assessed a penalty for “nonqualified” withdrawals.
529 plans offer a off” savings approach: Funds invested in the plan are professionally managed.
Penalty for Refunds
You will be subject to a federal 10% penalty on the earnings portion of a nonqualified withdrawal. In addition, the earnings on nonqualified withdrawals are taxed at your tax rate and not the student’s. However, you may be able to avoid a nonqualified withdrawal by rolling over the account to a new beneficiary.
Effect on Financial Aid
Any investment may affect a student’s eligibility for financial aid. Earnings withdrawn from a 529 plan are treated as income to the child and will show up on the following year’s financial aid application. Thus, you may want to reserve 529 funds for use in a student’s later years.
It’s Worth a Look
Keep in mind, there is no guarantee that any investment portfolio will achieve its investment goals. The value of your 529 account will fluctuate as the value of the mutual fund shares in which it invests fluctuates, so that your investment, when it is withdrawn, may be worth more or less than its original cost.
Also, be aware that out-of-state plans may have state income tax ramifications.
Happy 5-2-9 day!
College Education Savings Strategies
Saving for college can be complicated, and you want to have the confidence that you are calculating how much you need to be saving for your children’s education. We at Washington Wealth Advisors have ample experience in helping to establish 529 plans, as well as proactively working together as a trusted partner to our clients on their overall wealth management strategies.
If you are ready to start your education savings plan or want to review what you have begun, we are here to help. Call our office at 703.584.2700, email firstname.lastname@example.org or book an appointment online with us. We are ready to support you.
IMPORTANT WASHINGTON WEALTH ADVISORS DISCLOSURE INFORMATION
Washington Wealth Advisors is a fee-only registered investment advisory firm serving busy families, executives, women building wealth, and small business owners. We provide Wealth Advisory Services—financial planning coupled with asset management—guided by a personalized investment strategy based on each client’s unique goals. Our fiduciary approach, independent advice, and proactive investment management help to support our clients’ overall financial peace of mind.