5 Questions You Should Consider When Using 529 Plans for Education


A Guide to Understanding How 529 College Savings Plans Work

Are you planning to save for your child's college education?

Did you know that there is a more tax-efficient way to save for your children’s and grandchildren’s future educations? 

If you are interested in saving money to pay for educations, you should consider a 529 plan, otherwise known as a “Qualified Tuition Plan." A 529 plan essentially functions like a Roth IRA if used for education expenses.  You can make after-tax contributions to a 529 plan and invest the funds in the plan.  The funds will grow tax-deferred and if you withdraw the funds to use for post-secondary qualified education expenses, you will not pay any taxes or penalties on the withdrawals.  There are a few questions that clients often ask us about 529 plans:

  • Who should open a 529 Plan?: Anyone, including a parent, grandparent or students themselves, (the owner) can open a 529 plan for a student (the beneficiary). There are no age or income limits to a 529 Plan and anyone can be named as a beneficiary.  The owner controls the investment decisions and the withdrawals from the plan for the beneficiary.  We recommend, if possible, that a grandparent owns a 529 plan for the benefit of their grandchildren.  A 529 plan is included in a parent’s assets for purposes of applying for financial aid, but they are not included if the account is owned by a grandparent.  If your student may need additional financial aid, it is better to keep the 529 plan out of the considered parental assets. 
  • How do I fund the 529 Plan?: You can gift $15,000 annually to a 529 plan without triggering a gift tax. Each grandparent can put $15,000 into a 529 Plan for the benefit of the student or $30,000 per couple.  You can also elect to front-load a 529 plan, up to $70,000 (or $140,000 per couple), for 5 years of gifts.  This is a great advantage for those with large taxable estates.  Not only are you giving money to your children or grandchildren to use for education, but you are also able to move money out of your taxable estate.
  • Does it matter what state I open the account in?: You can use a 529 plan at any accredited college or university in the US, and some foreign institutions, regardless of what state in which you opened the account. Some states offer tax deductions on state income taxes by using in-state plans, but in Texas, we do not have a state income tax so this does not apply to Texas residents. 
  • How do I invest the 529 Plan?: As the owner, you can make the investment choices in the 529 Plan. You will want to consider the time horizon your student has until they start school when deciding how aggressively or conservatively you should invest the account.  You can make investment changes in a 529 plan twice a year. 
  • What if my student gets a scholarship or doesn’t use all the funds in the 529 Plan?: A beneficiary change can be made by the owner to another family member, without any penalty or tax consequences. One 529 plan can be used for multiple children or grandchildren. 

With the holidays quickly approaching, many of you may be thinking about what to give your children or grandchildren as gifts.  While that new video game or new car may be exciting now, giving them the opportunity to have an education is a gift that continues to give and can be their most valuable long-term investment.

 

As Ernie Fletcher, 60th Governor of Kentucky said, “Education is our greatest opportunity to give an irrevocable gift to the next generation.”

 

 

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Corporate benefits may change at any point in time. Be sure to consult with human resources and review Summary Plan Description(s) before implementing any strategy discussed herein. Willis Johnson & Associates is not a CPA firm.