Higher education is an essential part of any modern society. Not only does it help produce more enlightened citizenry, but higher education is also becoming increasingly more necessary just to maintain a decent quality of life in the modern economy. However, one of the major obstacles many face in obtaining a higher education is the rising cost of college tuition. This is why it is never too late for parents to start saving for their children’s college expenses. One effective way of doing so is through the use of a 529 savings plan.
What is a 529 savings plan?
A 529 savings plan is an investment vehicle designed to assist families in saving for a college education. Parents are able to save into this investment vehicle which provides significant tax benefits based on a Federal tax law created by Congress in 1996.
What entities sponsor 529 plans?
State governments or financial institutions can sponsor 529 plans. For example, the State of Connecticut sponsors a 529 plan known as the Connecticut Higher Education Trust (CHET) which is managed by Fidelity. Also, financial institutions can offer their own 529 plans directly to families.
Benefits of 529 savings plans
Families enjoy a variety of benefits by utilizing 529 savings plans to prepare for the future college costs of children. With a 529 savings plan you will take advantage of federal tax benefits that allow you to grow your invested capital tax-free as long as you withdraw funds for the purpose of qualified college educational expenses. Additionally, you are allotted tax-free withdrawals of up to $10,000 per year to pay for K-12 tuition.
Many states will offer tax benefits for residents taking advantage of a state-sponsored 529 plan. For example, Connecticut residents are allowed to deduct up to $10,000 per year for joint filers on contributions made to CHET accounts.
Contribution limits for 529 plans
Most 529 plans offer a high lifetime contribution limit. For example, the CHET plan has a $550,000 lifetime contribution limit per beneficiary as of October 1, 2022.
Changing beneficiaries
The owner of a 529 plan has the option to change the beneficiary of an account to a family member of the beneficiary. This can include siblings, cousins, spouses, in-laws and more. Also, once each calendar year the plan owner can transfer the account to a different 529 plan without incurring penalties.
Gifting rules
There are special rules you need to be aware of if you are gifting to a 529 plan. Usually, you are allowed to gift up to the annual gift exclusion amount without using up your lifetime gift tax exclusion amount. The annual gift exclusion amount is $16,000 for 2022.
If you are gifting to a 529 plan you are allowed to give up to five times the usual annual gifting limit in the same calendar year. This means individuals can give up to $80,000 and married couples can give up to $160,000 for 2022. Giving a lump sum will allow more time for the funds to grow tax-free in the 529 account. This also allows you to reduce the reported value of your estate. However, be sure to consult your accountant on how these gifting rules specifically affect your tax planning.
How does it work?
A parent or grandparent or anyone over 18 years of age can open a 529 savings plan for a beneficiary of any age with any state plan or financial institution. However, when choosing your 529 plan make sure to be aware of the tax benefits your state government offers you as a resident. This can help better integrate the college savings plan into your overall financial planning strategies.
Also, consider the available investment options each plan offers as this will vary between different plans. Take a look at the fees and other expenses charged. Additionally, make sure that the financial institution sponsoring the 529 plan has a good reputation and a proven track record.
Following the initial contribution, additional contributions can be made at any time. Investment changes can be made to the plan twice per calendar year.
Consult with Kreitler Financial on how to save for college using a 529 college savings plan.
*This content is intended for educational purposes only. The 529 Plan program disclosure contains more information on investment options, risk factors, fees and expenses, and potential tax consequences. Please contact your financial advisor for more information and to obtain a 529 Plan program disclosure. Please see the Important Disclosure link below.