With the cost of college ever-increasing, it’s never too soon to start planning for your child’s future. Like many parents, you might be interested in the 529 plan, an investment account that serves as an excellent savings vehicle for education. Many people end up choosing this plan- here’s 9 reasons why you should join them.
Tax- Free Growth
One of the main appeals of the 529 plan is that it allows withdrawals for eligible expenses to be made tax-free. Its unique flexibility covers the essentials, like tuition, room and board, books, and technology. You can even take out up to $10,000 in a lifetime for loan repayments under the SECURE Act. However, you’ll want to research eligible expenses before withdrawing in order to avoid penalties- ineligible expenses receive a 10% penalty and in addition are taxed as income.
This doesn’t just benefit college students- the Tax Cuts and Jobs Act (2017) allows the withdrawal of up to $10,000 a year from 529 plans tax-free for K-12 education. This limit varies from state to state, but is not included in federal income.
Tax Deduction
If you donate to your state’s 529 plan, you might be eligible for a tax deduction, with the stipulation that you are a resident of the state. Some states like California do not offer a tax deduction; it’s a good idea to look at other states and compare 529 plans to find the best investment plan for you.
Parent/ Grandparent Asset
The parent or grandparent who creates the 529 plan owns the asset. This gives them the power to change the beneficiary. If the beneficiary says no to college, no problem! The asset owner can change the beneficiary to anyone- a family friend, a relative, or even oneself.
No Income Limitations
While many investment accounts prohibit deductions above a certain income bracket, the 529 plan has no income limitations. No income limitations means everybody gets to enjoy the great tax benefits this plan has to offer.
High Contribution Limits
The contribution limit, determined by each state’s 529 plan, ranges from $200,000 to $550,000. These don’t just differ between states, but within them. One state can have multiple plans with different limits, so do extensive research to determine which one is best for you.
Frontload up to Five Years
With high contribution limits, you might want to get a headstart. However, since the 529 plan is considered a ‘gift’, you cannot contribute more than $15,000 per year without filing a gift tax return. That is, unless you frontload. Frontloading for up to five years allows an individual to donate up to $75,000 dollars to a beneficiary in the same year without paying gift tax. Married couples can donate up to $150,000.
If the individual is gifted anything beyond this, you must file gift tax returns.
Use $10k/ Year of 529 Plan
Under the Tax Cuts and Jobs Act, up to $10,000 a year from the 529 plan can be spent on K-12 education. Again, there are exceptions state by state. California, for example, will require you to report it as income even though it is not taxable on a federal level.
Portable to Other States
Moving to another state? Your plan can too. Another benefit of the 529 plan is that it’s portable. You can take it with you, or keep it in its original state. You only need to change its state if you want to move from a state that does not offer a tax deduction to a state that does. You might then consider opening up a new 529 plan in that state, and contributing money to the state’s 529 plan.
Low Cost
529 plans are largely low-cost, which opens up several investment options including index funds. These are mutual or exchange-traded funds that follow market indices with the goal of making a microcosm of the market. You can choose by index, or by age-based index funds. Like target-date funds, these start with aggressive growth and become more conservative as the beneficiary grows older, up until matriculation.
Final Thoughts
With college tuition exceeding inflation, there’s no time like the present to start saving for your child’s future. That’s where the 529 plan comes in. Varying state-to-state, this investment vehicle allows you to make sizable contributions- and withdraw tax-free when the time comes, assuming they’re for eligible expenses. While this plan is a great fit for some, it’s also good to consider the disadvantages before you make any decisions.
Are you considering the 529 plan? Still undecided? Let us know, and tell us what else you’d like us to cover.
Looking for an independent fiduciary financial advisor who can advise you on investments, retirement, real estate, alternative assets, and taxes? Contact ACap Advisors & Accountants to schedule a free initial consultation. Our clients include individuals, small businesses, entrepreneurs, and anyone serious about saving and investing for their future.
