529 Tips and Tricks Everyone Should Know

529 Plans Topics

Are you a parent or a grandparent that will help a family member pay for education beyond high school?  While there are many choices for people in this situation one of the best education planning tools for families is state-sponsored 529 plans.  These plans offer tax-deferred growth on your investment and are tax-free if used for qualified educational expenses.  Also, many states will offer tax breaks or incentives for people who invest in their state’s 529 plan.  The following are some common misconceptions about 529 plans in general.

The first and one of the most common mistakes is that you are limited to your state’s 529 plan.  While many states make it very attractive to invest in their plans by offering tax breaks on your income taxes or lower fees on the investments, they may not be the best options in the long run.  Many states have very different plan options that have better returns, lower fees, or more attractive options to invest in that are more in line with your investment strategy.  And yes, you need an investment strategy even for your 529 plan as they do play a role in your overall financial state.  Shop around from state to state to find a plan that best fits your needs, but you also need to consider your states plan with tax incentives factored in.

Another area that causes confusion is the limits that one can contribute to a 529 plan.  Many people think that they are the same as IRA contributions.  While gift-taxes may come into play in this area it generally is not a primary issue.  For individuals, they can contribute up to $14,000 with imposing a gift-tax.  Married couples can do what is called a split gift and double the contribution up to $28,000 in a calendar year.  And when it comes to 529 plans and contributions you are allowed to contribute up to five years at once to a 529 plan without triggering the gift-tax.  That means an individual can contribute $70,000, and a couple can contribute $140,000 for a single year but then make no more gifts to that family member for a full five years.  Each state does set contribution levels so check with the state you plan to invest with to see their annual contribution limits.

Many people also think that they are not allowed to make contributions to a 529 plan due to their incomes.  While this is true for a Coverdell Education Savings Account 529 plans have no such income limitations.  When it comes to a 529 plan, there are no income limitations at all and anyone can open or contribute to a family member’s plan.

529 plans also do not have to be held in your child’s name.  Although it is best to name a beneficiary and a parent or trustee listed as the owner.  When it comes to these educational plans the donor and not the beneficiary is the one in control.  That means that a child who has a 529 plan established for them does not get control of the funds once they turn the age of majority and would possibly want to spend the money on something other than education expenses.

Another major misconception about 529 plans is that the money will be lost if the child does not go to college or they get scholarships to defer the planned cost.  This is not the case as beneficiaries can be changed to another sibling, family member, or even the donor.  And in the event that there is no one who can benefit from the 529 plan the donor can take the funds and earnings back provided they pay the taxes on the earnings and a 10% penalty.  But that is a worst case scenerio.  Also, there is no age limitation on who can be the beneficiary of a 529 plan which is unlike a Coverdell account.

And these plans can be used for education expenses other than those that are at a four-year university.  Many qualified educational expenses are allowed at trade schools or professional programs.  When in doubt on if an expense is allowed check with your plan to get a definitive answer.

As far as financial aid goes these accounts may hurt your child’s chances to a degree, but the benefits far outweigh the negative affects of having a 529 plan.  If you child does get a large financial aid package remember you can always change the beneficiary on the account to another family member without any penalty.

These are some of the more common questions and misconceptions about 529 plans.  If you have any additional concerns about these excellent saving tools feel free to contact me.

Contact Us

We're not around right now. But you can send us an email and we'll get back to you, asap.

Not readable? Change text. captcha txt
0