With summer winding down and school getting ready to start up again, college savings and preparing for the future always seem to be top of mind for my clients at this time of year. I’m reaching out in case that’s true for you, too, and you’d like to start looking into college savings programs like a 529.
I know there can be some confusion around 529s, their tax benefits, and where they fit into an overall financial strategy, so I wanted to break down some key information here:
- How to fund a 529 plan is a big consideration for many people. But did you know that you could open an account with a gift? Under current tax law, a person can "gift" anyone up to $16,000 a year ($32,000 for spouses splitting gifts). The recipient typically owes no taxes and doesn't have to report the gift as income. That means you can make relatively large annual contributions without worrying about the gift tax.
- You can also make larger contributions, up to $80,000 ($160,000 for married couples, filing jointly), and still avoid the gift tax by treating the contribution as though it were made over a five-year period.
- Even though a contribution to a 529 plan leaves your estate, it still remains in your control, since you oversee all of the account’s investment choices, beneficiary designations, and distributions.
- Earnings in a 529 plan grow federal tax-free, and won’t be taxed when the money is withdrawn to pay for qualified educational expenses, such as tuition, fees, books, supplies, and computers.
- Another great benefit to know about - if your child doesn't use all of the funds, you can use up to $10,000 for other siblings. You can also transfer 529 funds from one beneficiary to another family member who is in school.
Although the named beneficiary of a 529 has no legal rights to the funds in a 529 account, starting one is also a great way to introduce the financial strategy conversation to your children and grandchildren.
If you’re interested, I’d love to talk with you and your family about the role of a 529 in your college planning. Let’s schedule a time to get together and walk through your choices!