Planning for college is something that many families spend a lot of time thinking about. With the recent tax reform, the use of 529 education savings accounts has expanded according to an article from Forbes, “Benefits Of 529 Education Accounts Expanded Under 2017 Tax Reform”. The 529 can be a great way to assist in paying for a child or grandchild’s education no matter the level.
With the 529 savings plan you contribute funds to the account and name a beneficiary of the account. The money is invested and then the income and gains compound tax-free. When the money is distributed to pay for qualified education expenses, the distributions of the principal and earnings are also tax free.
Before the tax reform, qualified education expenses were only for college and postgraduate expenses. Now, the owner of the 529 plan can withdraw $10,000 per year per beneficiary and use those funds for an expanded definition of education expenses, which include elementary and secondary school qualifying expenses, public or private. For K-12, only tuition qualifies for tax-free distribution. Up to $10,000 of tuition can be covered by the plan. Although, the $10,000 is per student not account, so if the student is the beneficiary of more than one account, they are still capped at the $10,000.
Along with college planning benefits, there are also estate and gift tax benefits. Making contributions to the account can qualify for annual gift tax exclusion. Since the reform, you can deposit up to $15,000 per beneficiary without it effecting your lifetime estate and gift tax exclusion. You can even bundle five years of annual gifts in one year and make a $75,000 contribution tax-free.
There are many benefits to the 529 education savings accounts, if you think it is beneficial to you and your family talk with an estate planning lawyer to determine how to use a plan to best fit your family.
For more information on this and other estate planning topics, visit our website and schedule your consultation today!
Reference: Forbes (June 16, 2018) “Benefits Of 529 Education Accounts Expanded Under 2017 Tax Reform”