All About 529 Education Plans

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23 Jan Banner-01

The 529 Education Plans are quite lucrative. They are friendly, flexible, and available to everyone who wants to save on a bit of college costs. The unfortunate part is that not many are aware of its full potential, and the 529 Education Plan is being used only by 30% of the taxpayers even after 20 years of its existence. 

Investments in 529s can prove to be very fruitful. The withdrawals are usually exempt from federal and state taxes if you use them for qualified educational expenses. Many of the States also offer state tax deductions, even credits, to further encourage investments into such plans. 

In this blog, we will throw light on the five aspects of the 529 Education Plans which can help parents, grandparents and anyone who wants to save on some college cost find a recourse. 

Flexibility

The 529 Education Plans are flexible and have no income limitations. If you are an adult, then you can very well open an account on any person’s behalf. Most of the plans will allow you to change beneficiaries; in fact, you can also name yourself as the beneficiary of this account. 

The lifetime contribution limit is quite generous, which ranges from $2,00,000 to $3,50,000 per beneficiary. These plans are state-sponsored, and hence you can participate in nearly any state across the U.S, but participating in your state can earn you extra benefits which are exclusive to state residents. 

Another great benefit of investing in 529 Education Plan is that you can use the amount of your saving for elementary and high school education, and eligible international schools as well. Many institutes such as art institutes, community colleges, and vocational schools are also included.

State Tax Credits

Many states offer state tax deductions and credits for investment into 529 Education Plans, and hence you shall start you search in your state to avail the best tax benefits. 

There are some states like Colorado that provide state income tax deductions to the extent of a person’s taxable income. While, some other states like Oklahoma and Illinois offer state income tax deduction of up to $10,000, if filing individually, and $20,000, if married and filing jointly. 

Relative Tax Benefits

Though 529 Education Plans offer state tax deductions and credits, these should not be the only factors to consider making such contributions. An investment should be smart, and you shall consult your state financial advisor who can probably compare various investments options and guide for the best one. 

As far as 529 Education Plans are concerned, we suggest that you look for a plan that offers age-based portfolios. The benefit with such a characteristic is that these plans generally shift the allocation as the beneficiary approaches college. 

Estate Tax Planning Tool

The most significant benefit of 529 Education Plans is that they enable you to save money for college costs while reducing the size of your taxable estate. The contributions are subject to estate taxes because they are generally not considered a part of your estate. The condition finds eligibility only if you use such amount for eligible education expenses. A point to keep in mind is that you are still the owner of your assets and can access your money at any time.

Another great feature is that anyone, including grandparents, are eligible to contribute up to $15,000 if filing individually, and $30,000, if married and filing jointly, without triggering a gift tax. Also, they can bundle up their contribution of up to $75,000, if filing individually, and $1,50,000, if married and filing jointly. The applicable condition in the latter case is that they would need to elect on a gift tax return for the year of the contribution.

If means permit, then you also have the option to take advantage of six-year gift tax averaging. You can do this by making one year’s contribution in December and follow it by making five-years of contribution in January. This would effectively lead you to make 6-year’s worth the investment in just two months. The point to note in this case is that if the contributor dies during the five years, then a part of the contribution would be considered for estate tax-related purposes. 

Minimal impact on Financial Aid

The impact of 529 Education Plans on financial aid is almost negligible. We can say that as long as the account custodian is the parent, the children financial aid will not exceed 5.6% of the account value.

Grandparents have the option to contribute to a parent’s plan. If the grandparent’s set-up their own account, definitely they will be able to avail state tax deductions and also control the account but choosing this way may affect the financial aid of the grandchildren. 

Conclusion

The 529 Education Plans are a good option for investing money for your child or dependent’s education. The plan carries many benefits like its flexibility, state tax benefits, and much more, which allow you to save big on your federal income tax and state returns. If you are planning to make investments to reduce the size of your taxable income, then 529 Education Plans are worth the consideration. To find out more about the same and see how exactly the Education Plan can benefit you, you can contact the MyTaxFiler expert and explore all the nuances of the 529 Education Plan. 

 

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