November 19, 2015

Give the gift of higher education with a 529 plan

By J. J. Montanaro
Magazine
Give the gift of higher education with a 529 plan
Give the gift of higher education with a 529 plan

If you’re looking for a gift with staying power, consider one to help your child or grandchild offset those skyrocketing costs.

Education may not be on your mind entering the holiday season, but with the cost of a bachelor’s degree from a public university nearing six figures, maybe it should be.  

If you’re looking for a gift with staying power, consider one to help your child or grandchild offset those skyrocketing costs.  

Specifically, I’m talking about 529 college savings plans. These tax-advantaged plans offer a unique way to save for college. They’ve been around for more than 10 years, and while most are sponsored by individual states, you can use accumulated money at a college anywhere in the country. 

Whether you’re considering setting up a 529 account for your child or contributing to one for your grandchild, here are seven things to understand:

  • Big tax benefits. The account is tax-deferred, and you won’t end up paying federal income tax on withdrawals – on neither what you contributed nor the earnings – assuming the money is used for qualified higher-education expenses. 
  • Low entry and high contribution limits. Typically, you can set up an account with as little as several hundred dollars and add as little as $25 on any occasion. On the other hand, most plans let you accumulate up to several hundred thousand dollars for the beneficiary.
  • Flexibility. You can change the beneficiary to another eligible family member, and if the money goes unused, it reverts to the account owner. Note, however, that earnings on “non-qualified” withdrawals would be subject to income taxes and a 10 percent penalty.  
  • Turnkey investment options. With premixed static portfolios and age-based portfolios that become more conservative as the beneficiary nears college age, most plans offer investment possibilities that won’t eat up a lot of time.  
  • Favorable financial aid treatment. Plans owned by the student or parent receive favorable treatment as parental assets in calculations for federal financial aid. This means that using a 529 plan is unlikely to limit the student’s access to needs-based grants, scholarships or loans. One caution: withdrawals from accounts owned by grandparents or other third parties are considered untaxed income to the student and can negatively affect eligibility for financial aid, so you may want to steer clear of that approach. 
  • State income tax savings. Some states offer state income tax deductions for 529 contributions.
  • They aren’t for everyone. If you’re looking to save for expenses outside what the IRS considers “qualified,” these plans may not be for you. Generally, qualified higher-education expenses in this context include tuition, fees, books and supplies, and room and board (with limitations). Unlike some other saving options, 529 plans are limited to higher education, so expenses for elementary or secondary school, or even transportation, are not considered qualified.

Learn more about the advantages and limitations of 529 plans by checking out IRS Publication 970. This year, as you’re preparing for the holidays, consider a gift that will help your family avoid the student-loan crisis.

J.J. Montanaro is a certified financial planner with USAA, The American Legion’s preferred provider of financial services. Submit questions for him online.

 

 

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