The Kids Are Growing Up ... and College Is on the Horizon (Gulp!)
Like many of you, last week we joined the legions of parents ushering their school-aged kids onto school buses and driving the carpool. And while we marveled at how much the kids have grown, some quick math also reminded us that the clock is ticking—faster than we’d like—to reach our college savings goals. If you’re a parent in the same boat, “back-to-school season” is prime time to review your family’s future education funding needs—and confirm if you are on track to meet your goals.
If you’re already contributing regularly to a 529 College Savings Plan, fantastic! You’re already on your way. If you haven’t yet opened a 529 plan for a child, or if you’ve gotten sidetracked on making contributions, here’s a quick refresher on what makes the 529 plan such a great savings vehicle for college.
The 529 Tax Advantage
Most people who are planning ahead for a child’s or grandchild’s college education are aware of the tax advantages of starting 529 College Savings Plan. Funded with after-tax money, your invested 529 savings grow tax free—and then, in the future, can be withdrawn to pay for a child’s qualified education expenses with no additional taxes on earnings.
Currently, 529 account owners can contribute $15,000 per year per beneficiary (or a “bundled” contribution of up to $75,000 every five years) without triggering the gift tax. In a two-parent, two-child household where each parent opens 529 accounts for each child, the maximum annual contribution matrix looks like this:
Every state (except Wyoming) and the District of Columbia offer at least one 529 plan option. You are not limited to your own state’s 529 plan and can open a plan in another state. However, the plans can vary in their cost and quality, so it’s important to do your research. Many people opt to go with their own state’s 529 plan if there are associated state income tax deductions/credits. For example, here in Virginia you can deduct up to $4,000 per account per year and carry forward any excess contributions to future tax years (account owners age 70 and over can deduct the full contribution amount in the year they contribute).
Details about each state’s 529 offerings and related tax policies can be found HERE.
Some Other 529 Perks You May Not Be Aware Of …
In addition to the tax and estate planning advantages of saving for college through a 529 plan, there are some lesser known ways that a 529 can be used to support your family’s education needs. As your financial advisor, I can help you understand and evaluate these options as they may pertain to your unique situation.
529 Funds for K-12 Private School Tuition
Beginning in 2018 with the enactment of the new tax law, families can make a tax-free 529 withdrawal up to $10,000 per beneficiary per year to fund K-12 private school tuition.
A more extensive discussion of the K-12 education funding option, along with a list of states offering tax deductions/credits for 529 contributions, can be found HERE.
Note: Not every state has conformed to the 529 K-12 funding provisions in the new tax law. In some states, earnings on 529 contributions used for K-12 tuition expenses may be subject to state income tax or recapture of tax deductions/credits—so make sure you understand the rules specific to the state 529 plan you are considering.
529 Funds for Overseas Study
Students interested in heading overseas for college can use 529 funds for qualified expenses if the educational institution they are enrolled in is eligible for Title IV federal student aid. Over 400 foreign schools meet this requirement. You can use the U.S. Department of Education’s Federal School Code Search tool to determine if a school qualifies.
Students may also be able to use their 529 savings to help pay for an academic study abroad program through a U.S.-based college or university. Again, the school must be Title IV eligible and grant academic credit for the program.
Note: The same 529 rules apply for qualified educational expenses when studying overseas. While tuition, room and board, books, and certain equipment/supplies are covered, transportation and travel expenses are not.
Funds for Independent Study During a “Gap Year”
A growing trend in the U.S. is for students to defer college and take a “gap year” to pursue an independent area of study or interest. If this exploration involves enrolling in a program affiliated with a qualified Title IV school, it may be possible to use 529 funds to defray qualified expenses.
Transferability of 529 Funds to Another Beneficiary
Let’s say your child decides to go to a public instead of private institution or chooses another path that doesn’t include college. What are your options if you have “extra” funds in your 529 plan?
For starters, you may want to hang onto it for at least a few years in case your child wishes to use the funds in the future for graduate school, technical school, or other training. There is no “expiration date” for the funds to be used.
Another option is to change the beneficiary to a sibling or other qualified family member who will be attending post-secondary school, which can be done without tax implications. Some farsighted parents opt to hold onto the 529 plan for the education needs of future grandchildren. Maintaining the 529 for future qualified educational use will enable you to avoid paying taxes on earnings and the 10% penalty that applies if you take a distribution for non-qualified, non-educational expenses.
Note: If the 529 beneficiary receives a scholarship or attends a U.S. military academy, the 529 owner can withdraw an equivalent dollar value from the 529 penalty-free, but earnings are still taxable.
If you couldn’t tell already, I am a big proponent of 529 College Savings Plans. It’s how I plan to pay for college for my own three kids. I’m well aware that college savings goals can be daunting, even discouraging. But with some advanced planning, and the tax benefits of a 529 plan, they can be achieved. In the not-too-distant future, when you’re dropping your child off at a dorm room instead of the bus stop, you’ll be glad you made the investment.
Copyright © 2019. All Rights Reserved. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Estes Wealth Strategies is not a registered broker/dealer and is independent of Raymond James Financial Services.
Any opinions in this newsletter are those of Estes Wealth Strategies and John Estes and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information presented herein has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. It is not a statement of all available data necessary for making a recommendation, nor does it constitute a recommendation.
As with other investments, there are generally fees and expenses associated with participation in a 529 plan. This and other information about 529 plans is available in the issuers official statement and should be read carefully before investing. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Favorable state tax treatment for investing in Section 529 college savings plans may be limited to investments made in plans offered by your home state. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan.
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