Is funding your child’s education cost a personal goal that you plan to achieve? Are there alternatives to putting money away in a low-interest savings account or stuffing money under a mattress? Absolutely!
A 529 plan is one of the most cost and tax-efficient ways to save for your child’s future education expenses. 529 plans are structured to provide tax-deferred investment growth and tax-free withdrawals for qualified education expenses.
529 plans count tuition, fees, books, supplies, room and board as qualified expenses. Keep in mind that room and board will only be considered a qualified expense if the student is enrolled at least half-time.
However, there are expenses that are considered non-qualified which are not covered under a 529 plan. These non-qualified expenses include travel and transportation, health care, college applications and testing fees, along with fees for extracurricular activities.
The Benefits
If tax-deferred investment growth and tax-free withdrawals doesn’t pull you in, here are some of the other benefits of owning a 529 plan:
- Flexibility. 529 plans provide you with abundant amount of flexibility. You are in control when it comes to selecting investment options, changing beneficiaries, and electing contributions.
- Hands-off investing. 529 plans offer automatic investments options that link directly to your bank account, providing you with a disciplined approach to saving for your child’s future.
- State specific tax breaks. Certain states offer tax benefits when making contributions to a 529 plan. In the state of Georgia, contributions are deductible up to $8,000 per year per beneficiary for joint filer, and $4,000 per year per beneficiary for all others. Here is a list of state plans that offer an income tax deduction.
- Very few limits. Because of the flexibility 529 plans provide, they offer no income or age limits. In addition, 529 plan contributions up to $15,000 for SINGLES or $30,000 for MARRIED couples will qualify for the annual federal gift tax exclusion.
In recent years with the passage of the TJCA of 2017 and SECURE Act of 2019, extensions of 529 plan benefits were adopted.
TJCA 2017 – 529 plans can now be used to cover tuition expenses at private elementary and secondary schools. However, there is a $10,000 limit per beneficiary per year for private K-12 tuition expenses.
SECURE Act 2019 – 529 plan owners and beneficiaries are now eligible to repay up to $10,000 in qualified student loans.
Be Aware: Taxes & Penalties
It’s important to keep in mind that there are penalties and taxes associated with a 529 plan if you wish to pull money out for non-qualified expenses. For these types of distributions, you will be required to pay ordinary income tax on the amount withdrawn, along with a 10% penalty on the GAINS.
It’s encouraged that you shouldn’t withdraw money out of a 529 plan for non-qualified expenses. Below are strategies you can use to avoid paying taxes and penalties:
- Change the 529 plan beneficiary to a sibling or family member who will attend a private K-12 school or college in the future.
- Save the 529 plan for graduate school.
- Further your own education by making yourself the beneficiary of the 529 plan.
- Save the 529 plan for future grandchildren.
Engage with Us
With so many different 529 plans available today, it can be overwhelming trying to determine a plan that will work for YOU. To learn more about how you can set up the right 529 plan, please don’t hesitate to contact us!