It seems like the cost of college education only ever goes up lately—and by a lot! Parents, grandparents, aunts, uncles and other family members and friends are looking for ever-more-creative ways to get kids through college. This holiday season, think about giving the gift of a 529 savings plan, says a recent article from CBS News. There might be more benefits than you think!
Benefit #1: Tax Benefits. All contributions to a 529 plan are after-tax. However, any appreciation of the value of the plan is tax-free, provided the funds are only used to cover college-related expenses. Since states are the administrators of the vast majority of plans, some will give contributors a small write-off for their contributions, as long as they’re residents.
Benefit #2: 529 Plans Don’t Necessarily Damage Financial Aid Prospects. As long as you’re planning properly, a 529 plan won’t substantially impact a child’s eligibility for financial aid. Schools look at students’ assets and Expected Family Contribution, or EFC. They only count a maximum of 5.64% of parental assets as opposed to 20% of student assets. A higher EFC results in smaller financial aid. In some cases, it may be best to put the plan in the name of the child’s parents. To ensure the most minimal impact, speak with a financial professional before determining whose name should be on the plan.
Benefit #3: You Can Pre-Pay Tuition. If you or your child has a specific college or university in mind, there are some plans that allow you to “purchase” between one and four years of tuition at today’s rates. The plan then pays out at the then-current rates. For those concerned about the rising costs of higher education, this might be a good option.
Benefit #4: Contributions Qualify for Annual Gift Tax Exclusion. If you’re looking to make a more substantial gift, there’s good news! Your contribution to a 529 plan qualifies for the $14,000 annual gift tax exclusion, so there’s no gift tax on any contributions up to that amount per person, per year. Additionally, those looking to contribute more may contribute $70,000 and have it spread it out over 5 years for gift tax purposes. Before you make any gifts, you should review your estate plan. If you’ve done any irrevocable trust planning to protect assets from the nursing home (what we in our office often call a “lockbox”), you’ll want to consult with your trusted advisors before making any contributions. For our clients, please call our office before contributing to a 529 plan, making any gifts, donating to charity or making payments on behalf of another.
Benefit #5: There’s No Need to be a Pro. All 529 plans are professionally managed as well as “age-based” or “risk-adjusted.” That means that as the beneficiary of the plan ages, the investment portfolio takes on progressively less risky investments, such as moving from riskier stocks with a higher potential payout to more stable stocks or including more bonds in the portfolio. The portfolio should be relatively stable by the time a child needs to access the funds for college-related expenses.
What else should you know? Well, 529 plans are best for young children, since it gives the most opportunity for the account to appreciate in value. However, it doesn’t matter how old a child is; you can give to a 529 plan any time, even if they are currently in college! No kids? No problem! You can also use a 529 plan to save for higher education for yourself or a significant other. As long as the money goes to college expenses, withdrawals are not taxed.
There are no age limits on those who can contribute and you likely won’t need to worry about contribution limits, either. While it does vary by state, contribution limits range up to $500,000, so it’s not likely to be an issue. You can choose a plan from any state, but as we mentioned, there are some potential tax benefits to choosing a plan from the state in which you reside.
Plans are available directly, or through a financial advisor. If you’re just looking for a low-cost option, the “direct-sold” option may be best for you, but a financial advisor may have “advisor-sold” solutions that fit you. Speak with your financial professional and take a look at research from Morningstar or SavingforCollege.com, both of which rate plans annually.
Especially with the ever-increasing costs of higher education, the gift of a 529 savings plan could be an extraordinarily helpful one for a young child. Plus, there can be tax and estate planning benefits for you, too! Maybe instead of a new toy, you can give the gift of education this holiday season.
For more information on ways to maximize giving opportunities as part of your estate planning, explore our website and contact us to schedule your consultation today!
Reference: CBS News (November 28, 2016) “5 reasons to gift a college saving plan contribution”