Invest in Education: Leveraging 529 Plans for Back-to-School Success
As we enjoy the remainder of summer and get the kids ready to head back to school, I would like to use this time of year as a reminder to think about education planning for kids and grandkids. Planning for education expenses is a significant concern for many families. With the rising costs of tuition, it's essential to explore options that provide financial security and tax advantages. One of the most popular and beneficial methods to save for education is through a 529 education savings plan.
What is a 529 Plan?
A 529 plan, named after Section 529 of the Internal Revenue Code, is a tax-advantaged savings plan designed to encourage saving for future education costs. These plans are sponsored by states, state agencies, or educational institutions and come in two main types: Prepaid Tuition Plans and College Saving Plans. Prepaid Tuition Plans allow for prepayment of tuition at today's rates, guaranteeing that the tuition cost is covered regardless of future increases. College Savings Plans are investment accounts where funds can be used to cover qualified higher education expenses such as tuition, fees, room and board, books, apprenticeships, and more.
Key Benefits of 529 Plans
1. Tax Advantages: The most significant benefit of a 529 plan is its tax advantages. Contributions grow tax-deferred, and withdrawals for qualified education expenses are tax-free at the federal level. Many states also offer tax deductions or credits for contributions to 529 plans.
2. High Contribution Limits: Any amount of donors can contribute their annual gift tax exclusion, $18,000 per individual for 2024 to a 529 Plan. Additionally, 529 plans allow for 5-year lump sum contributions that could equate to $90,000 per individual or $180,000 for married couples. Each state has its own aggregate contribution limit, usually between $235,000 and $550,000.
3. Flexibility: Funds can be used at any accredited college, university, or vocational school in the United States and even some abroad. 529 plans can also to be used for K-12 tuition expenses and student loan repayments up to certain limits.
4. Control: The account owner retains control over the funds, regardless of the beneficiary's age. They can change the beneficiary to another eligible family member if the original beneficiary does not need the funds. Additionally, up to $35,000 of leftover funds in a 529 plan can be rolled into a Roth IRA if the plan is at least 15 years old.
5. Minimal Impact on Financial Aid: Funds in a 529 plan have a relatively minimal impact on financial aid calculations. They are considered parental assets in the federal financial aid formula which count less than assets owned by the student.
It should be known that 529 Plans are sponsored by states, state agencies, or educational institutions. At Allen Trust Company, we can assist in guiding you on the best way to open a 529 plan based on your situation and goals as well as assist in finding effective ways to fund these plans with our financial planning and wealth management expertise. Additionally, Allen Trust Company can help roll an existing 529 plan into a Roth IRA. Regarding a 529 plan rollover to Roth IRA, you should be aware that the rollover to a Roth IRA is subject to the annual contribution limit (2024, $7,000 under 50) and that the beneficiary of the 529 plan must also be the owner of the Roth IRA.
At Allen Trust Company, we strive to guide clients to success in navigating the complexities of the financial world. Whether you have questions about 529 plans, or other general financial questions we're here to guide you every step of the way to as you plan a bright and financially secure future for your children.
Parker M. Gallagher, MBA, CFP® is a Trust Officer and Assistant Portfolio Manager. Parker brings fresh industry perspective and a unique background to the team at Allen Trust Company. He has also a CERTIFIED FINANCIAL PLANNER™. To speak with Parker Gallagher, please contact our office at (503) 292-1041 or via email at info@allentrust.com.