Save more for college through the tax advantages of a 529 savings plan
With kids back in school, it’s a good time for parents (and grandparents) to think about college funding. One option that is beneficial if the children still have a ways to go until they’ll be starting their higher education, is a Section 529 plan.
529 plans are generally state-sponsored, and the savings-plan option offers the opportunity to potentially build up a significant college nest egg because of tax-deferred compounding. These plans can be particularly powerful if contributions begin when the child is young. Although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred. In addition, some states offer tax incentives for contributing.
Distributions used to pay qualified expenses. For example, things like tuition, mandatory fees, books, supplies, computer equipment, software, Internet service and, generally, room and board. These entities are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.
529 plans offer other benefits as well:
“¢ They usually have high contribution limits.
“¢ There are no income-based phaseouts further limiting contributions.
“¢ There’s generally no beneficiary age limit for contributions or distributions.
“¢ You can control the account, even after the child is a legal adult.
“¢ You can make tax-free rollovers to another qualifying family member.
Finally, 529 plans provide estate planning benefits: A special break for 529 plans allows you to front-load five years’ worth of annual gift tax exclusions, which means you can make up to a $70,000 contribution (or $140,000 if you split the gift with your spouse) in 2017. In the case of grandparents, this also can avoid generation-skipping transfer taxes.
One negative of a 529 plan is that your investment options are limited. Another is that you can make changes to your options only twice a year or if you change the beneficiary.
Whenever you make a new contribution, you can choose a different option for that contribution, no matter how many times you contribute during the year. Also, you can make a tax-free rollover to another 529 plan for the same child every 12 months.
About the author
Joe is a 2004 graduate of Mount Saint Mary’s University, with a bachelor’s degree in accounting. He is also a 2000 graduate of Archmere Academy in Claymont, Delaware. Joe started with the firm in 2002 as a part-time intern, joining full-time in 2004.
Since then, he has worked with a myriad of clients, including entrepreneurial firms, agricultural businesses and nonprofit entities, including those with OMB A-133 audits. Joe, along with the firm, contributes to Toys for Tots, Goodwill Industries, as well as several other community organizations. He is a member of the American Institute of Certified Public Accountants and the Delaware Society of Certified Public Accountants.