Many people are now familiar with the various key features of “529” college savings plans. Assets in these plans have tripled in the past decade, and now approach $300 billion, according to the College Savings Plans Network.
These plans enable you to set aside pre-tax dollars to help fund future education needs for your children, grandchildren, or other beneficiaries. They’re a great tax tool and can help ease the financial bite when tuition bills start to pile up.
These funds cover more than just tuition. They can be used to cover room and board, regardless of whether the student lives on campus, off campus, or even at home with parents. To qualify for the use of these funds, a student must be enrolled at least half time.
Also, you can switch beneficiaries in a 529 account, as long as the new beneficiary and the original beneficiary are close relatives. And you don’t have to use your own state’s plan, although certain states give tax benefits to residents who do so.
Lastly, know that a well-funded 529 plan won’t hurt your eligibility for financial aid, at least as much as other education funding vehicles. For example a Uniform Gift Trust to Minors (UGMA) carries a higher weighting in parents’ net worth determinations than 529 plan balances.
Please know that If you fail to spend 529 funds on education, the earnings portion of your distribution (i.e. the part beyond your contribution) is taxed as ordinary income, and the whole withdrawal will be hit with a 10% penalty.
Now, a range of key changes have recently been put in place with these plans that makes them even more attractive. Let’s take a closer look.
First, know that changes in the new tax law mean that you can now use a 529 account to pay for K-12 education as well as for higher education. It’s not necessarily an option you want to pursue. Pre-college spending can drain balances before the peak education spending years arrive.
Tapping these funds too early also means that the funds may not have enough time to sharply grow in value. Consider that a 529 plan for newborns will have nearly two decades to appreciate in value. As a result, it may be wiser to consider funding K-12 schooling with after-tax dollars.
These 529 plans are now more comprehensive. For example, you can now transfer up to $15,000 from a regular 529 plan to 529 ABLE accounts, which offer tax-favored savings for people with disabilities without affecting eligibility for benefits such as Medicaid.
Withdrawals from a 529 ABLE account can be tax-free if used to pay expenses such as housing, legal fees, and employment training. The total assets in an account can reach $100,000 without affecting SSI benefits.
The new tax law, which places a $10,000 deduction cap on state and local taxes (SALT) makes it more important than ever to put aside pre-tax dollars. The SALT provision is set to expire in 2016, and as we don’t know what tax laws will look like after that, this becomes an especially important time to look at tax-savings strategies like 529s.
If you would like to review your 529 options, please contact us at huguenotfinancialplanning.com