What is a 529 plan? Get education savings and tax savings working in tandem for you and your college-bound family.
When you think of investment accounts, an education savings plan may not be the first thing that comes to mind. But if you want to help family, friends, or even yourself pay for learning, you might consider adding a 529 plan to your financial playbook and tax strategy.
529 savings accounts can be used in some states for primary education, but mostly they should be used for college. According to the College Board, published in-state tuition and fees at public four-year institutions rose an average 3.1% a year beyond inflation between 2008–09 and 2018–19.
Enter the 529 savings plan. According to the rules, funds from these tax-advantaged investment accounts can be used for a beneficiary’s qualified education expenses such as “tuition, fees, books, as well as room and board at an eligible education institution and tuition at elementary or secondary schools,” according to the IRS.
While 529s can be useful for investing toward education expenses for family or friends, you can also use them to invest toward your own education. Perhaps a 529 plan could be useful for those who say to themselves, “When I retire, I want to go back and live my dream,” said Dara Luber, senior manager of retirement for TD Ameritrade.
Of course, you also have to think about your own future, which may mean saving for retirement. You’ll have to balance that need versus wanting to invest toward someone else’s education.
When thinking about a savings hierarchy, Luber said people may want to consider socking away money into a 529 savings plan after they have established an emergency fund, are meeting their own goals for retirement, and have paid down non-mortgage debt such as credit cards and their own student loans.
“You should consider setting aside money for retirement first,” she said. “You cannot take a loan for retirement; you can take a loan for college.”
It’s not just parents that can save for their kids’ college, she noted. Children can also get scholarships or grants and be part of work-study programs. Less-expensive in-state schools can be an option.
And it’s important to set children’s expectations and not let them think you’ll pay for all their education if you can’t afford it, she said.
“You have to balance it out so that you’ve got your own future set,” she said.
An investor should consider a 529 plan’s investment objectives, risks, charges and expenses before investing. A plan’s Program Disclosure Statement, which contains this and more information, should be read carefully before investing.
Investors should consider before investing whether their or their beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program and should consult their tax advisor, attorney and/or other advisor regarding their specific legal, investment or tax situation.
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1A donor may elect to treat a contribution to a beneficiary's account as made ratably over a five-year period. As a result a donor may make a contribution to a beneficiary's account of up to $75,000 as of January 1, 2018 (or up to twice that much if the donor and his or her spouse elect to “split” gifts) without any negative gift tax consequences, so long as the donor does not make any additional contributions to the account (or any other gifts to the account beneficiary) during that tax year or any of the succeeding four calendar years. A Federal Gift Tax Return (Form 709) is required to be filed. Please consult with your tax or legal professional. If the donor dies before the end of the five-year period, the portion of the contribution allocable to years after the donor's death will be includible in the donor's estate for Federal estate tax purposes.
Investments in 529 plans are not guaranteed or insured by the FDIC, SIPC or any other government agency, and are not deposits or other obligations of any depository institution.
Withdrawals used to pay for qualified higher education expenses are typically free from federal income tax. These expenses include tuition, fees, books, computer equipment and software, supplies and equipment required for enrollment at a qualified institution of higher education. Room and board is considered a qualified education-related expense if the student is enrolled on at least a half-time basis. The earnings portion (if any) of a Non-Qualified Withdrawal will be treated as ordinary income to the recipient and may also be subject to an additional 10% federal tax penalty.
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