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Q&A: What are 529 College Savings Plans and their tax advantages?

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As college costs continue to rise (the estimated cost per each year of college at a 4-year public university for today’s newborns is over $50,000 per the College Board, College Cost Calculator – December 2020). It is important to evaluate different opportunities to save for college and invest sooner than later. 529 College Savings Plans have become a popular strategy to do so. This is due to the variety of options on the market and their tax advantages.

WHAT IS A 529 COLLEGE SAVINGS PLAN?

A 529 College Savings Plan is a state-sponsored savings account. This account allows families to plan for and invest in their children’s education. Previously, these plans were only be for higher-education expenses (college). This has changed, and in some states, you may now use up to $10,000 per year for K–12 education expenses. There is no yearly withdrawal limit for qualified higher-education expenses.

With these plans, the account is in the parent’s name (or grandparent), with the child listed as the beneficiary. Each state’s plans are managed by a state-assigned fund manager with multiple portfolio options, allowing you to choose the plan that best meets your goals. It is important to note that you are not limited to your state’s 529 plan and can shop between states to find the best plan for your family. Also, if your circumstances change (i.e., scholarships, child decides not to attend college, etc.), the 529 Plan account may be transferred to another beneficiary.

WHAT ARE THE TAX ADVANTAGES?

Any earnings in a 529 plan are tax-deferred, and withdrawals are tax-free (when used for qualifying expenses like tuition, room/board, and books). Unfortunately, you cannot contribute to these plans pre-tax, but you may be eligible for state income tax deductions if you reside in a “tax parity state.” When contributing to these plans, gift tax rules and state-specified contribution limits do apply, so it is best to do so with the assistance of an advisor or tax consultant to limit any negative tax implications.

QUESTIONS?

Reach out to our team if you have any additional questions regarding 529 plans. Our advisors regularly help our clients set up plans to invest in their child’s, grandchild’s, or other relative’s future.

The College Savings Plan Network also offers additional information on 529 College Savings Plans. This includes links to the plans for many states. Click here to visit their site.

Author: Dan Savage | Wealth Management Advisor
Written: December 15, 2020