Planning for college is becoming increasingly important with higher education tuition on the rise and with the national student loan debt recently breaking 1.5 trillion dollars1. Many parents and grandparents are thinking about how they can help the next generation pay for college. One option is the 529 college savings plan.
A 529 college savings account is a state-sponsored investment account with tax benefits to incentivize saving for future college expenses. The contributions to a 529 college savings plan grow tax deferred and the earnings are not taxed as long as they are used for qualifying education expenses. Qualified education expenses may include tuition and fees, books, necessary software, internet access, and housing costs while attending school. This applies to community college, undergraduate, graduate, and trade schools. Additionally, under the Tax Cuts and Jobs Act of 2017, up to $10,000 from a 529 plan can be used for private, public, or religious elementary or secondary school tuition per year.
It is important to note that if the funds withdrawn are not used for qualifying education expenses, the gains will be subject to ordinary income tax plus an additional 10% penalty.
One 529 plan can have multiple beneficiaries; however, it is important to note that only one beneficiary can use the funds at a time. For this reason, it is a best practice for each student to have his or her own 529 plan.
A 529 plan can be funded through annual gifts from family members. In 2019, the gifting exclusion limit is $15,000 per person per beneficiary. 529 plans also offer an election which allows you to gift up to $75,000 up front and have your contribution treated as if you had made it over a five year period for gift-tax purposes.
While there isn’t an annual contribution limit to 529 plans, most states do have a total account limit. This varies by state, so to see your state plan and limits click here.
When considering opening and funding 529 plans, be sure to first consult with your CPA and financial planning team.