With your normal day-to-day expenses and long-term goals like retirement to think about, saving for your child's college education can be challenging. To help families set aside money tax free for future college costs, the IRS created state-sponsored 529 plans in 1996.
Your local Edward Jones financial advisor is familiar with your state's 529 plans and can help you think through any questions you might have:
Whether you're new to saving for college or have been socking away money for a while, it's a good idea to work with an Edward Jones financial advisor to walk step-by-step through your strategy. The most important thing is to start soon, while time is on your side.
Anyone – at any age – who plans to attend college can be the beneficiary of a 529 plan. The account owner, not the beneficiary, controls the account and makes all the investment decisions. But if the beneficiary decides not to attend college, the owner can change the beneficiary to another member of the family.
Grandmas, grandpas, family friends, parents … anyone can contribute to a 529 plan, regardless of income. Contribution limits depend on the state's plan but are typically more than $200,000.The federal gift tax exclusion allows a contributor to give up to $15,000 per year per beneficiary, or $30,000 if you're giving as a married couple. You could also choose to give up to five years of gifts in one year, and that amount is removed from your estate. However, if an electing contributor dies during the 5-year period subsequent to the contribution, amounts of the contributions allocable to years after death are includible in the contributor's gross estate.
The 529's earnings accumulate tax free, and withdrawals are federally tax-free and penalty-free as long as they are used at an eligible educational institution for:
Distributions used for nonqualified educational expenses are subject to ordinary income tax plus a 10% penalty on the earnings.
There's a common misconception that state-sponsored 529 plans are only geared to families that plan on sending their children to a state school, but that's not true. Regardless of the state in which the 529 plan was set up, the distributions can be used at an eligible educational institution in any state. “Eligible educational institutions” are any accredited postsecondary schools that offer classes toward a bachelor’s, associate’s, graduate or professional degree. Many vocational institutions and foreign schools are eligible, too.
Some states provide tax incentives to residents who invest in their home state's 529 plan. And six states – Pennsylvania, Arizona, Missouri, Minnesota, Montana and Kansas – provide for state tax parity, which means contributions to any state plan are eligible for that state's income tax deduction.
College savings plans can impact a student's financial aid. Regardless of whether the 529 plan is owned by the parent or the student, it is considered a parental asset, which generally has little impact on financial aid. For more information on your specific state financial aid considerations, talk to your financial advisor.
Financial aid is a complex subject and a financial aid officer should be consulted.
Withdrawals used for expenses other than qualified education expenses may be subject to federal and state taxes, plus a 10% penalty. There may be state tax incentives available to in-state residents who invest in their home state’s 529 plan. Student and parental assets and income are considered when applying for financial aid. Generally, a 529 plan is considered an asset of the parent, which may be an advantage over savings in the student’s name. Make sure you discuss the potential financial aid impacts with a financial aid professional. Tax issues for 529 plans can be complex. Please consult your tax advisor about your situation. Edward Jones, its financial advisors and employees cannot provide tax or legal advice.