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One financial strategy you might consider? Setting up a 529 plan. A 529 plan is a state-sponsored education savings plan that can be used toward elementary, secondary, in some states, and/or higher education expenses of the account beneficiary. 529 plans offer account owner tax advantages, flexibility and control.
Your Edward Jones financial advisor can help you determine how a 529 plan might work with your overall financial strategy, as well as think through specific questions you might have:
Anyone – at any age – can be the beneficiary of a 529 plan. The account owner, not the beneficiary, controls the account and makes all the investment decisions. And if the beneficiary decides not to attend college, the owner can generally change the beneficiary to another eligible family member.
Grandmas, grandpas, family friends, parents … anyone can contribute to a 529 plan, regardless of income.
While setting aside money for education may seem challenging for young families, parents should not delay saving since time is one of the biggest assets. Delaying saving even a few years can have a big effect. Setting aside money each month can make all the difference in reaching the family's education savings goals. A 529 plan should follow:
Contribution limits depend on the state's plan but are typically more than $235,000.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.
Contributions from friends or other family members are considered gifts from that person. They do not affect the gifting limits of the parents. Friends or family members can also contribute to an existing account they do not own or establish an account to retain ownership. Gifts to 529 plans, will count toward the annual gifting limit.
You could also choose to give up to five years of gifts in one year, and that amount is generally not considered to be a part of your estate for federal estate tax purposes. This is called the accelerated giving provision. If an investor contributes the full amount, no other gifts can be made to the same beneficiary within the five-year period without incurring gift tax or using up a part of the donor's lifetime exclusion. However, if an electing contributor dies during the five-year period after the contribution, amounts of the contributions allocable to years after death are included in the contributor's gross estate.
All 529 plans prohibit contributions once the account balance for the beneficiary reaches a certain point, which is generally in excess of $235,000, but can vary depending on the plan. In addition, the owner of the 529 plan may make an election that allows the owner to contribute up to five times the annual exclusion amount ($75,000 in 2020 per contributor, per beneficiary in a single year. The election allows the gift to be considered prorated over five years. For example, a married couple with two children can contribute $150,000 to each child in one year.
Investors who participate in their home state’s plan may be eligible for a state income tax incentive for contributions made, as well as other potential state benefits, such as financial aid, scholarship funds and protection from creditors.
The 529's earnings accumulate tax-free, and withdrawals are federally income tax-free and penalty-free as long as they are used for qualified education expenses. Some examples of qualified post-secondary education expenses include:
529 plan distributions for qualified higher education expenses and up to $10,000 a year per beneficiary for elementary and secondary school (public, private and religious) tuition expenses are not subject to federal income tax.
There's a common misconception that state-sponsored 529 plans are only geared to families who 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. An “eligible educational institution” is any schools offering higher education beyond high school. It s any college, university, trade school, or other post-secondary educational institution eligible to participate in a student aid program run by the U.S. Department of Education.
In some states, qualified withdrawals for federal tax purposes have been expanded to include up to $10,000 in tuition, per year, per beneficiary, in connection with enrollment or attendance at public, private, or religious elementary or secondary schools. Check with your financial advisor about your state's specific withdrawal guidelines for 529 plans.
Effective January 1, 2020 after the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, student debt repayments and registered apprenticeships are now considered a qualified expense for 529 accounts. States may vary in the treatment of these expenses. Clients should be advised to consult with their tax professional for questions they have regarding the potential state tax consequences of paying for tuition expenses associated with attendance at an elementary and/or secondary school with 529 plan funds.
Some states provide benefits including state tax incentives to residents who invest in their home state's 529 plan. And seven states – Pennsylvania, Arizona, Missouri, Minnesota, Montana, Arkansas and Kansas – provide for state tax parity, which means contributions to any state plan are eligible for that state's income tax deduction.
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.
1If you live in a state that does not recognize the expanded use of 529 plan funds and will be required to adopted additional legislation regarding its 529 plan and state income tax incentives, and you withdraw funds before those states recognize the use of 529 plan funds for elementary or secondary school tuition, you may risk having to repay a state tax deduction you've already received, may face state taxes on the investment gains in the account and/or may incur additional penalties. We recommend you consult a qualified tax advisor regarding your situation.
Withdrawals used for expenses other than qualified education expenses may be subject to federal and state taxes, plus a 10% penalty on the earnings portion of the distribution. State tax incentives and additional benefits may be available to in-state residents who invest in their home state’s 529 plans. Student and parental assets and income are considered when applying for financial aid. Generally, a 529 plan is considered an asset of the parent if the owner is a parent or dependent student for financial aid purposes. 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.
This content should not be depended upon for other than broadly informational purposes.
Please consult your tax advisor about your situation. Edward Jones, its financial advisors and employees cannot provide tax or legal advice.