Sav­ing for Ed­u­ca­tion? Con­sider a 529 Plan

Calhoun Times - - FRONT PAGE - De­wayne Bowen


Here are some of the key ben­e­fits of a 529 plan:

- Po­ten­tial tax ad­van­tages – A 529 plan’s earn­ings are not sub­ject to fed­eral in­come taxes, as long as with­drawals are used for qual­i­fied ele­men­tary, sec­ondary and higher ed­u­ca­tion ex­penses of the des­ig­nated ben­e­fi­ciary, such as your child or grand­child. ( You will be sub­ject to or­di­nary in­come taxes, plus a 10 per­cent fed­eral penalty, on the earn­ings por­tion of with­drawals not used for qual­i­fied ed­u­ca­tion ex­penses.)

- High con­tri­bu­tion lim­its – Con­tri­bu­tion lim­its are gen­er­ally quite high for most states’ 529 plans. How­ever, you could pos­si­bly in­cur gift tax con­se­quences if your con­tri­bu­tions, plus any other gifts, to a par­tic­u­lar ben­e­fi­ciary ex­ceed $ 15,000 dur­ing a sin­gle year.

- Abil­ity to switch ben­e­fi­cia­ries – As the old song goes, “The fu­ture is not ours to see.” You might name a par­tic­u­lar child or grand­child as a ben­e­fi­ciary of a 529 sav­ings plan, only to see him or her de­cide not to go to col­lege af­ter all. But as the owner of the plan, you gen­er­ally may be able to switch ben­e­fi­cia­ries when­ever you like, right up to the point when they start tak­ing with­drawals. (To make this switch non- tax­able and penalty- free, you must des­ig­nate a new ben­e­fi­ciary who is a mem­ber of the same fam­ily as the orig­i­nal ben­e­fi­ciary.)

- Free­dom to in­vest in any state’s plan – You can in­vest in the 529 plan of­fered by any state, re­gard­less of where you live. But if you in­vest in your own state’s plan, you might re­ceive some type of state tax ben­e­fit, such as a de­duc­tion or credit. Ad­di­tional ben­e­fits also may be avail­able.

- Flex­i­bil­ity in chang­ing in­vest­ments – You can switch in­vest­ment op­tions in your 529 plan up to twice a year. Or, if you’d rather take a more hands- off ap­proach, you could se­lect an au­to­matic age- based or tar­get date op­tion that starts out with a heav­ier em­pha­sis on growth- ori­ented in­vest­ments and shifts to­ward less risky, fixed- in­come ve­hi­cles as the ben­e­fi­ciary ap­proaches school or col­lege age.

While a 529 plan clearly of­fers some ben­e­fits, it also raises some is­sues about which you should be aware. For ex­am­ple, when col­leges com­pute fi­nan­cial aid pack­ages, they may count as­sets in a 529 plan as parental as­sets, as­sum­ing the par­ents are the plan own­ers. To clar­ify the im­pact of 529 plans on po­ten­tial fi­nan­cial aid awards, you might want to con­sult with a col­lege’s fi­nan­cial aid of­fi­cer.

One fi­nal note: In pre­vi­ous years, 529 plans were limited to el­i­gi­ble col­leges, uni­ver­si­ties and trade schools, but start­ing in 2018, you can also use up to $ 10,000 per year, per ben­e­fi­ciary, from a 529 plan to pay for tu­ition ex­penses at pub­lic, pri­vate or reli­gious ele­men­tary and sec­ondary schools. ( Not all states rec­og­nize ele­men­tary and sec­ondary school ex­penses as qual­i­fy­ing for 529 plan ben­e­fits, so con­sult your lo­cal tax ad­vi­sor be­fore in­vest­ing.)

Ed­u­ca­tion is a great in­vest­ment in a child’s fu­ture. And to make that ed­u­ca­tion more af­ford­able, you might want to make your own in­vest­ment in a 529 plan.

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