In a climate of economic uncertainty, one thing’s for sure — higher education comes with a hefty price tag. According to Sallie Mae’s latest “How America Pays for College” report, 33% of families used a college savings account like a 529 to pay for college in 2022. However, there is still a lot of misunderstanding about 529 plans and their benefits. In this article, we’ll explain what you need to know about 529 plans and how they can help your family save for a range of educational costs.
529 Plans Offer Considerable Income Tax Benefits
529 plans are investment plans that provide tax benefits to investors. The plans offer tax-free growth at both the federal and state levels as long as the funds remain invested within the plan. When used for qualified educational expenses, withdrawals from the plan are also free from federal taxes and most state income taxes. To incentivize saving and investing, some states offer deductions or credits for contributions to 529 plans. Although 529 plans are state-sponsored, investors can participate in plans offered by any state. However, it is advisable to consult a financial advisor to determine the benefits offered by your state’s plan, which may offer exclusive benefits to residents.
They Can Be Used to Cover a Range of Education-Related Expenses
529 plan funds are applicable for tax-free use towards tuition and other qualified expenses, including room and board, books, and supplies, at a variety of post-secondary institutions. This includes but is not limited to vocational schools, community colleges, international school expenses, and certain apprenticeship programs. Furthermore, it is now possible to use up to $10,000 to repay qualified student loans.
Grandparents, Relatives, and Friends Can Contribute
The contribution limits for 529 plans are quite generous, with some plans allowing up to $235,000 to $500,000 per beneficiary. This makes it possible for family members and friends, including grandparents, to contribute to a child’s education savings. Moreover, 529 plans can also function as an estate planning tool, with individuals being able to give up to $16,000 per year (or $32,000 for married couples) to any person’s 529 plan without incurring a gift tax.
Pro tip: In Illinois, there is a 3% charge on all contributions made to 529 plans through a broker, but at 83rd Street we show our clients how to avoid it.
Anyone Can Be a Beneficiary
Beneficiaries of 529 plans have no age or income restrictions, making it possible for any adult to open an account for the benefit of any individual’s future educational expenses. Account owners have the flexibility to change beneficiaries at any time and for any reason, including designating themselves as the beneficiary.
529 Plan-to-Roth IRA Account Transferability
The excess funds remaining in a 529 plan after a student finishes college have been a problem for some in the past, as the only way to withdraw the money without penalty was by transferring it to another beneficiary, such as a younger sibling. However, the recent SECURE 2.0 law provides another solution by allowing funds to be rolled over from 529 accounts to Roth IRA accounts. To be eligible for this rollover, the 529 plan must be at least 15 years old, and annual rollovers are limited to the maximum Roth IRA contribution amount adjusted for inflation. The lifetime maximum for rollovers is $35,000.
Invest for the Future
At 83rd Street, we provide our clients with comprehensive wealth management, meaning that we look at all aspects of life that affect your financial health. One aspect? Education funding and college saving strategies. We understand that you have made significant efforts to safeguard the future of your children. Our goal is to help you ensure the continued success of your next generation.
If you have any inquiries regarding the suitability of a 529 plan for your unique circumstances, please get in touch with us. We’re more than happy to take a look.
The information and opinions contained in this letter are derived from proprietary and nonproprietary sources deemed by 83rd St. Wealth Management, LLC to be reliable. Additional information about 83rd St. Wealth Management, LLC is available in its current disclosure documents, Form ADV and Form ADV Part 2A Brochure, which are accessible online via the SEC’s investment Adviser Public Disclosure (IAPD) database at www.adviserinfo.sec.gov, using CRD # 172115. 83rd St. Wealth Management, LLC is neither an attorney nor an accountant, and no portion of this content should be interpreted as legal, accounting or tax advice.
