Many grandparents and parents want to pay for private school or college for their children and grandchildren. A 529 plan with significant tax benefits can be your best option, especially if you’re wealthy.
The 529 Plan is a tax-effective savings plan designed to help individuals and families save for future education expenses. The name comes from Section 529 of the Internal Revenue Code, which regulates this type of plan.
This is similar to a Roth 401k or IRA, except that instead of providing tax benefits for retirement savings, it provides tax benefits for education savings. increase.
Anyone can set up a 529 account and designate anyone as a beneficiary, including children, grandchildren, friends and even themselves, and there is no limit to the number of plans you can set up.
If you are a grandparent, you can start your own 529 plan or donate to a 529 plan set up by your child’s parents.
529 Plan funds are invested after tax, but savings grow tax-free and all distributions are tax-free.
These plans, also called “qualified tuition plans,” are sponsored by states, state agencies, or licensed educational institutions. You can search and compare plans at College Savings Plan Network.
The 529 plan isn’t just for colleges. Up to $10,000 per year is available for domestic and international elementary, middle, and high schools, as well as two-year associate degree programs, colleges, and vocational schools. The $10,000 can also be used to pay off existing student loans.
529 funds can also be used, up to the limit, for tuition, books, and technology for the school, as well as room and board costs related to college expenses.
Room and board expenses are limited to the school’s estimated cost of living for nine months per year.
Student health insurance, even if offered by the university, cannot be covered by 529.
529 plans offer flexibility regarding the selection of beneficiaries. If the original beneficiary does not use all or part of the funds, the account holder may transfer the beneficiary to another eligible family member without incurring taxes or penalties.
Note: There are limits to how often you can make changes. Depending on your plan, you may only be allowed to change your beneficiary once per year, or you may need a specific qualifying event to make the change.
Tax benefits are one of the biggest benefits of the 529 plan. Increased investment within the plan is tax-free as long as the funds are used for eligible educational expenses. This tax-free growth can translate into significant savings in the long run.
Many states offer additional tax benefits for contributions to 529 plans. These benefits include state income tax deductions or deductions, which may reduce your overall tax burden.
All contributions and earnings to the 529 plan extend outside of your taxable property. You also remain in control of your account.
A prepaid tuition plan, also known as a guaranteed tuition plan, allows you to pay in advance for a specified number of years of credit or tuition at the participating university.
As mentioned above, account holders can control funds in the 529 account even after the beneficiary reaches the age of majority. This control ensures that funds are used for their intended purpose.
Beginning January 1, 2024, you will be able to roll over up to $35,000 of your remaining funds in your 529 Account to your Roth IRA Account if your Fund is 15 years or older.
according to research According to the Brookings Institution, the 529 benefits are relatively small for all but the richest families.
529 plans can affect financial aid, but there are many complicated considerations.
Whether the 529 Fund cuts the financial aid package depends largely on the account holder. Here are some considerations:
- If 529 is owned by a parent or student, approximately the first $10,000 will not count towards the FAFSA grant calculation.
- For parents saving over allowance, only a maximum of 5.64% of the parent’s wealth is counted, but 20% of the student’s wealth is counted.
- Distributions from parent- and student-owned accounts are not included in “base year income,” which reduces eligibility for financial assistance.
- Assets owned by grandparents or other relatives do not affect a student’s FAFSA. However, distributions from grandparents’ accounts count as FAFSA student income. This income is valued at 50% of her. This means that if a grandparent funds her $5,000 in expenses, a student’s aid eligibility may be reduced by her $2,500.
Note:
FAFSA looks at income two years ago, so if it’s reasonable, grandparents would prefer to wait for college junior and senior year funding to avoid impacting financial aid. maybe.
Beginning in the 2023-24 school year, grandparent-owned 529 plans will have less impact on financial aid eligibility through the simplified FAFSA.
There is a great sense of satisfaction that comes from helping to shape another generation. Part of this satisfaction comes from helping my grandchildren pursue their educational goals, such as going to college.
“Many parents and grandparents feel some sort of emotional obligation to pay for college, and they do so at the expense of their own old age,” said Rapid City’s Kahler Financial. Sarah Swantner, a certified financial planner at the group, said. , South Dakota.
But spending a lot of money on educating children and grandchildren can derail retirement plans and leave seniors with even more problems to deal with.
“They may actually do more harm than good,” says Debra Dillon, a certified financial planner at Dillon Financial Planning in Eagle, Idaho. “At the end of the day, if you don’t have millions of dollars left in your account to support retirement and college, you will have to support your children.” [financially]”
Some flexibility is built into the 529 plan, and you can now move some funds into your retirement account, but the funds are intended to be used for education.
Taxes and penalties may apply if funds are used for ineligible expenses.
529 plans may be subject to administration fees, administration fees, and other charges that may affect your overall earnings. It’s important to check and compare the charges associated with different plans.
529 plans have no contribution limits. However, contributions to these accounts are considered gifts for federal tax purposes, and his 2023 contributions in excess of the annual gift tax credit ($17,000) are tax deductible for lifetime property and gift taxes.
This means that in 2023, the couple can jointly contribute double this amount, or $34,000, since there are two people making the donation.
You can also make a lump sum contribution. At one time he can donate $85,000 (equivalent to $17,000 annually over five years), unless other contributions are made to the same beneficiary in the next five years.
Each state also has a total contribution limit for 529 plans. The total amount each beneficiary can contribute cannot exceed certain limits. These limits range from $235,000 to he $550,000. (This limit is based on expensive college and graduate program tuition, which includes textbooks, room, and food.)
Most 529 plans offer a variety of investment options, including mutual funds and age-based portfolios. This allows account holders to choose an investment strategy that fits their risk tolerance and time horizon.
However, your options for investing in 529 plans may be limited compared to other investment vehicles.
If your beneficiary attends a public school (or one of a consortium of private schools) in your state, you may be able to use the 529 Fund to pay for tuition in advance. The advance payment guarantees that the current tuition fee is fixed. There is no need to pay extra money as the tuition fee increases year by year.
Due to the complexity of these accounts, we recommend that you consult your financial advisor or tax professional.
Does the 529 plan make sense for you?
First of all. You’ll want to know how a 529 account will affect your retirement finances and long-term planning for your wealth and security. Use the NewRetirement retirement planner to determine if you can afford your education.
You can also use this tool to model the financial impact of a 529 plan. Create and model contributions to this account type to see the tax implications. NewRetirement offers the most comprehensive set of tools for achieving long-term wealth and security.