When someone thinks of the 529 education savings plan, they usually think of a convenient way to invest and save for college and schooling costs tax-free. They do this, but accountants and financial experts say they are also useful estate-planning tools that have uses well beyond education costs.
These savings plans could become even more useful as soon as the White House is looking to raise taxes to expand government programs. President Biden had discussed lowering the estate tax exclusion from $11.7 million per person to $5 million per person or even to $3.5 million per person. If this change were to be implemented, lots of American families would suddenly be looking for ways to reduce their estate.
That is where a 529 plan is perfect. Other tactics used to reduce the value of your estate are not reversible; once you have reduced that value it can not be obtained again. The 529 plan on the other hand can have beneficiaries and owners changed multiple times. With proper planning, a 529 plan can become an effective way to fund the education of your children, grandchildren, and possibly future generations.
How the 529 Plan Works
The plans’ funds consist of after-tax dollars, however, all the money withdrawn is tax-free if it is used for education expenses such as tuition. If the funds are used for purposes other than education, you must pay income tax as well as a 10% penalty. You are also not taxed on money that is considered part of the original contribution to the plan.
Individual states have versions of 529 plans, but you can use a plan from any state even if you do not live in that state. However, there could be tax advantages for using your home state and other states may have different contribution limits.
The owner of a 529 plan must decide on a single beneficiary, this is usually a parent or guardian setting up the plan for a child or grandchild. Beneficiaries can be easily adjusted as long as they remain in the same family.
How to Max Out Your Contributions
You can contribute up to $15,000 per year per beneficiary with a 529 account. However, each account owner is permitted to add up to 5 years of contributions upfront without having to pay gift taxes. This means a couple could contribute up to $150,000 at once per beneficiary.
Creating a Long-Lasting Education Fund
If you want to create a 529 plan that lasts multiple generations, you will need to make a plan for transferring ownership as well. Many clients will use 529 plans for their grandchildren’s education, and they will set their children as future owners should they pass away.
Everything 529 Plans Can Cover
The federal government recently approved new tax-free uses for this type of account; you can now use them to pay up to $10,000 in student loans.
529s can also be used to pay up to $10,000 towards private elementary and high schools per year. A variety of 529 plans can also be used for education expenses for students with special needs.
They can also be used for cooking courses, language courses, or training for a new career at any accredited institution.
There is also a special situation for children awarded college scholarships. They can take funds equivalent to the scholarship amount out of the 529 without the 10% penalty, however, they will have to pay taxes on gains.
There are certain expenses for students that do not qualify for these exceptions such as travel expenses, healthcare, and personal expenses.
529 Plan for Expenses Other Than Education
You will not be able to get the same tax savings, but a 529 can make sense for non-education expenses in specific situations.
In the period immediately after graduation, if your child does not end up using all of the funds for their college expenses, they can withdraw the money and pay gains tax and the 10% penalty. However, considering the money could have grown tax-free for several decades this can be a good deal.
Similarly, a wealthy family could contribute money to a 529 and then suffer major financial problems. In the year of the crisis, they can take money out of their 529 without paying much in taxes since they are temporarily in a lower tax bracket.
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