Taxes

Transforming Your Family’s Future with a Sec 529 Plan

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Arin Gregoryona, CPA

August 3, 2024

Saving for education can be one of the most important financial goals for families, especially with rising tuition costs. A Section 529 Plan offers a powerful, tax-efficient way to prepare for these expenses. Here’s how you can leverage a Sec 529 Plan to maximize your education savings and secure a brighter future for your family.

What is a Sec 529 Plan?

A Sec 529 Plan, named after Section 529 of the Internal Revenue Code, is a tax-advantaged savings plan designed to help families save for educational expenses. There are two main types of 529 Plans: prepaid tuition plans and education savings plans. This guide focuses on education savings plans, which offer flexibility and broad applicability for funding various educational expenses.

Tax Benefits of Sec 529 Plans

One of the main advantages of a Sec 529 Plan is its significant tax benefits:

  • Tax-Free Growth: Investments in a 529 Plan grow without being subject to federal income tax.
  • Tax-Free Withdrawals: Funds withdrawn for qualified education expenses are not subject to federal income tax.
  • State Tax Benefits: Some states offer tax deductions or credits for contributions to a 529 Plan, enhancing the overall tax efficiency.

Funding a Sec 529 Plan

Contributions to a 529 Plan are made with after-tax dollars and must be in cash. Many plans have low minimum contribution requirements and offer convenient funding options such as payroll deductions or automatic transfers, making it easier for families to contribute regularly.

Who Can Contribute to a Sec 529 Plan?

Anyone can contribute to a 529 Plan—there are no income or age limits. This means that parents, grandparents, relatives, friends, and even neighbors can all contribute to a beneficiary’s 529 Plan, providing a wide range of contributors to support educational savings.

Gift Limitation and the 5-Year Option

In 2024, individuals can contribute up to $18,000 per beneficiary per year without incurring gift tax. For those looking to contribute more upfront, the 5-year gift tax averaging option allows for a lump-sum contribution of up to $90,000 (or $180,000 for a married couple) to be spread over five years for tax purposes. This requires filing Form 709.

Higher Education Credits

Taxpayers can claim education credits like the American Opportunity Credit or Lifetime Learning Credit while excluding from gross income amounts distributed from a 529 Plan, as long as there’s no double-dipping for the same expenses.

Impact on Financial Aid

529 Plan assets are generally considered parental assets, which means they have a smaller impact on financial aid eligibility compared to student assets. If a grandparent owns the 529 Plan, distributions may impact financial aid but will not affect eligibility if the funds are used for the beneficiary’s education.

Qualified Expenses and Recent Enhancements

Funds in a 529 Plan can be used for a variety of education-related expenses, including tuition, books, and supplies. Recent changes have expanded eligible uses to include K-12 tuition (up to a certain limit), apprenticeship programs, and up to $10,000 in student loan repayments.

Refunds and Recontribution

If a portion of a distribution is refunded due to changes in educational plans, it can be recontributed to the 529 Plan within 60 days to avoid taxation, allowing for greater flexibility in managing education expenses.

Handling Remaining Funds

After completing education, remaining funds in a 529 Plan can be:

  • Left in the plan for future education expenses.
  • Transferred to another family member’s 529 Plan.
  • Withdrawn, though non-qualified withdrawals will incur income tax and a penalty on earnings.

529 Plan Rollovers to Roth IRAs

Starting in 2024, funds from a 529 Plan can be rolled over into a Roth IRA under specific conditions, including:

  • Lifetime Limit: Up to $35,000 can be rolled over over the beneficiary’s lifetime.
  • Account Aging: The 529 account must be open for more than 15 years.
  • Contribution Limits: Rollovers are subject to Roth IRA annual contribution limits.
  • Five-Year Rule: Contributions made in the last five years cannot be rolled over.

529 Plan Rollovers to ABLE Accounts

Funds can also be rolled over to an ABLE account, which supports individuals with disabilities. The rollover must be completed within 60 days and adhere to annual contribution limits, offering a way to repurpose education savings for disability-related expenses.

Contribution Limits and Early Planning

Although there is no federal limit on annual 529 Plan contributions, each state’s plan has a maximum contribution limit, typically reflecting the cost of a high-end education. Starting contributions early maximizes the benefits of compound growth and tax-free earnings.

A Sec 529 Plan is a versatile and tax-efficient tool for education savings. By understanding its features and taking advantage of its benefits, families can significantly enhance their ability to support educational goals. For personalized advice on how a Sec 529 Plan can fit into your family’s financial planning, contact us to explore your options.

Arin Gregoryona, CPA

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