June 1, 2017 • General Planning

529 Savings Plans – Hard to Beat!

With an all-in four-year cost that can exceed $250,000, saving and investing wisely for college is challenging but imperative. We believe 529 savings plans (from Section 529 of the Internal Revenue Code) are among the best options for parents, grandparents and anyone else with an interest in helping to fund a child’s college or post-graduate education. The terms of plans vary by state but generally include:

Tax advantages

  • Funds in the plan grow income tax deferred
  • So long as used for “qualified education expenses” (may include books, fees and room and board in addition to tuition), withdrawals are income tax free – there’s no tax on account appreciation
  • A state income tax deduction may be available each year money is contributed
  • Funds in the plan are exempt from estate taxes in most circumstances

Continuing control and flexibility

  • The account owner continues to control who the beneficiary is and can change the beneficiary to a different “eligible” family member
  • The owner can withdraw funds if desired, but there will be a 10% federal penalty tax on account earnings
  • The beneficiary can attend any eligible educational institution – does not have to in his/her or the account owner’s state of residence

Substantial contributions allowed

  • The account owner often can contribute significantly in excess of $200,000 to an account
  • Five years of the current $14,000 per year gift tax exclusion amount can be donated at one time; accordingly, a married couple could contribute up $140,000 in one shot
  • There are no phase-outs of allowable contribution amounts regardless of the income level of the account owner
  • Accounts may be established for multiple beneficiaries

Varied investment options

  • Most plans offer a variety of investment options, including age-based plans which evolve to more conservative investments as the child gets closer to college age

Starting early with a 529 is a big advantage in that allows multiple years of tax-free earnings growth. We’ve found the site www.savingforcollege.com useful in comparing various states’ plans. And we recommend that anyone checking out plans also visit their specific state’s site given the potential state income tax deduction.