529 plans are best known as a college planning tool, but their reach is much broader in terms of what you can use it on and how it can help in financial planning. Let’s review some of the facts of 529 plans that go beyond paying for your child’s higher education tuition.
Education planning
- 529 plans can be used to pay for k-12 school tuition up to $10,000 per year.
- 529 plans can be used to pay for qualified expenses at any accredited private or public college, meaning not just tuition. This can include room and board, books, equipment, supplies, etc.
- While some states have a set age or timeframe for the withdrawal of the account, most state’s programs do not have such a limitation. Meaning you can use your 529 account to fund your education at any age.
- Most plans have a lifetime contribution limit of $350,000 and up. (Limits based on state).
Tax Planning
- Contributions accumulate tax deferred, and the earnings are tax free if used for the beneficiary’s education expenses.
- Contributions to a 529 are deductible in certain states up to a specified limit for state income taxes.
- Any unused funds in a 529 can be rolled over into a Roth IRA. This allows you to move the funds out of the 529 account without paying taxes or incurring a 10% penalty on the earnings for not using it for education. Some requirements apply.
Estate Planning
- Contributions to a 529 are considered gifts and are excluded from your taxable estate. You can gift up to $85,000 ($170,000 for married couples) in a single year to a beneficiary without federal gift tax consequences. Though you cannot make any additional gifts to that beneficiary over a 5-year period.
- Funds in a 529 account belong to the estate of the beneficiary. Meaning that if the account owner passes, the funds in the account will remain the property of the beneficiary.
- You can change the beneficiary of your account to a qualified family member at any time or roll funds into a different 529 account once per year or an ABLE account without incurring taxes or penalties. This helps ensure that the funds do not sit idle in an account for someone who may no longer need to pay for education for themselves.
Each state has discretion over their 529 plans, and they may offer some kind of tax break for participation. It is important to be familiar with the differences in rules when you are choosing which state’s plan to go with. You should discuss with a professional before using 529 accounts in tax and estate planning.
Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 college savings plans before investing. More information about 529 college savings plans is available in the issuer’s official statement. The official statement is available through your financial advisor and should be read carefully before investing. Before investing, it is important to consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program.
As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Tax implications can vary significantly from state to state.
Withdrawals from 529 accounts that are not used for qualified education expenses are subject to taxes and penalties.
As a result of the SECURE ACT 2.0, unused funds in a 529 account can be rolled over to a ROTH IRA for the beneficiary. The 529 account must have been open for a minimum of 15 years and Contributions made to the 529 plan in the last five years, including the associated earnings, are ineligible for a tax-free transfer. Rollovers to a ROTH IRA are subject to the standard annual ROTH IRA contribution limits.
You should discuss any tax or legal matters with the appropriate professional.
