A 529 plan is a U.S. tax-advantaged savings plan designed to save for future higher education expenses for a specified beneficiary.
Statistics show us that a college diploma opens the door to the possibility of a higher earning potential. Additionally, individuals with a college degree typically experience significantly lower levels of unemployment levels versus those that don’t have one.
Unfortunately, many students face tough challenges as they prepare for higher education. Consider today’s college landscape:
The average annual cost of a public undergraduate college degree is currently over $22,000, and it is expected to continue to rise. If it increases at the same 2.5% annual growth rate that it has over the past 20 years, by 2038, it could be over $34,000. At the same time, the average annual cost of a private college degree could jump from $50,000 to $79,000 by 2038.
The cost of college tuition has been increasing dramatically for decades, even outpacing health care costs and housing. Additionally, room and board, books, laptops and clubs continue to increase in cost, and should be factored into any budgeting discussions about education. All of these components of higher education can add up to a very formidable price tag.
While costs continue to increase, the pool of available financial aid is decreasing. The expectation is that college costs are not likely to fall, increasing the financial burden on families to close the gap.
Scholarships and grants help, but they’re not a financial plan. Relying on them is risky as not all students qualify, and they typically cover only a fraction of education costs. The average athletic scholarship is more than $18,000, the average merit-based scholarship is $11,287 and the average needs-based scholarship is only a little over $3,000.
Save for a Future
Contributing to a 529 plan offers many federal tax benefits, such as tax-free withdrawals for qualified expenses and gift tax exclusions. Through our relationship with the Scholar’s Edge 529 Plan, accounts can be opened for as little as $1, and have no income restrictions and a maximum investment of $500,000.
The uses for 529 plan savings dollars go beyond the things that are most commonly considered to be higher education expenses. Qualifying higher education expenses include:
• Enrollment or attendance at a college, university or other eligible post-secondary educational institution such as a vocational/trade school
• Up to $10,000 per year in tuition for K-12 schools
• Up to $10,000 in student loan repayments
• Post-college education
• Room and board
• Off-campus housing
• Books, equipment, technology, internet, etc.
Here are some more interesting facts. Thanks to the SECURE ACT, families can now use their 529 plans to repay up to $10,000 in qualified student loans. These can be loans owned by the student or their siblings. Changes to the tax code in 2018 have also made it possible to use 529 plans to cover K-12 tuition costs at public, private or religious elementary or secondary schools. This means even greater flexibility for using 529 savings.
Great for Grandparents
Grandparents often provide financial gifts to children and grandchildren. The ability to get the most benefit from a financial gift to the next generation can be increased by using a 529 plan. Generally, contributions to a grandchild’s 529 plan will count against the grandparent’s GST (generation-skipping transfer) lifetime exemption of $11.7 million if they exceed the $15,000 per beneficiary annual exclusion amount. However, grandparents may contribute more than the $15,000 annual exclusion amount without affecting their lifetime exemption by using five-year gift-tax averaging.
• Five-year gift-tax averaging With five-year gift-tax averaging, a taxpayer may contribute up to $75,000 per beneficiary when the contribution is treated as if it were made over a five-year period. If a grandparent contributes more than $75,000 to a grandchild’s 529 plan, only the excess amount will count against the grandparent’s lifetime exemption limit. Taxpayers must report 20% of the total 529 plan contribution for each of the five years. If the grandparent dies within the five-year period, a pro-rata portion of the 529 plan contribution will be added back to the grandparent’s estate. For example, if the grandparent dies in year three, the contributions corresponding to years four and five will be included in the grandparent’s estate.
One of the biggest misconceptions we hear from clients is the notion that if you do not use the money for the beneficiary's college expenses you lose it. There are a variety of ways to utilize 529 assets that are not used by the original intended beneficiary or, for whatever reason, the money is not used for qualified higher education expenses.
• You can always change the beneficiary to another qualifying family member who is planning on attending college.
• If a parent owns the 529 account and the child does not go to college, opt to save the funds for a future grandchild.
• You can use the money in a 529 plan for your own education. This includes either for completing a degree or for simply taking classes to help learn new skills and build your resume.
• Take a non-qualified withdrawal at any time for any reason. Only the earnings portion of the distribution will incur taxes and penalties. Contributions (the principal) will never be taxed or penalized since they were made with after-tax dollars.
Utilize 529 Plans
To learn more about 529 plans and if they would be right for you, speak with Wealth Watch Advisors today. It’s easy, simply click on the button and we will connect you with an Advisor in your area. They can work with you to determine how a 529 plan may fit into your overall financial plan.