Today (5-29) is National 529 Day

This day on the calendar marks a great opportunity to promote the use of 529 plans for college education funding.  Through regular investments, smart investment choices, and starting early you can eliminate, or significantly reduce the amount of student debt that will be necessary to send your children to college.  Please allow us at Lydford Financial to help you save for the college education of your child, grandchild, or other relative and strive toward the goal of graduating debt-free.

The cost of a college education has been increasing for years at a higher rate than annual inflation on other living expenses, so the requirement to save for your child’s education expenses is important.  A college education is a good investment in your child’s future opportunities as demonstrated by survey after survey comparing college graduates with people that have a high school diploma.  However, a college education may not be the best thing for a child when their family ends up saddled with tens of thousands of dollars in student debt.  Therefore, saving for your child’s education is an investment in your overall family financial goals as well. 

  1. Basic Characteristics of a 529 Plan

The best college savings option available for most people is a 529 plan that is sponsored by a state government, employer, or private company where anyone may contribute funds on behalf of an individual beneficiary.  The earnings on the 529 plan assets grow tax deferred and they are state and federal income tax free if the withdrawals are used for higher education expenses including tuition, books, fees, and room and board.  Section 529 plan funds do not count as the student’s assets for financial aid purposes.  The person who contributes the funds to a 529 plan retains control of the funds and may designate a different beneficiary at any time. 

Overall, a 529 education savings plan is the best investment option for higher education expenses if you take advantage of low fees that some states offer and a bonus is when your home state offers a state tax deduction.  Many states offer a state income tax deduction for contributions to a 529 plan in your home state up to certain limit and some states offer a state income tax deduction for contributions to any 529 plan.  (For example: New York state offers a state income tax deduction of up to $5,000 ($10,000 for married couples filing jointly) for contributions if you are a New York State taxpayer.

The account ownership is retained by the contributor, so the beneficiary can be changed at any time in case the original beneficiary does not attend college, or does not need the money. The 529 plans are rated based on their investment options, quality of companies that manage the plan, and the state tax deduction. A 529 account owned by a relative other than parents does not work against the student’s chances for financial aid.  The 529 plan set up by a relative will not show up on financial aid forms unlike the parents’ contributions that will be reflected on the financial aid documents. 

  1. How much can be contributed to a 529 Plan and what type of investments should be used?

Total 529 plan contribution limits are set by the states and range from a high of $235,000 to $575,000. However, to avoid gift tax consequences, federal law allows single taxpayers to contribute up to $18,000 in 2024 or make a lump-sum contribution of $90,000 to cover five years. Under the above gift provision, a contributor to a 529 plan may elect to apply the contribution against the annual exclusion equally over a five-year period while filing a gift tax return for the year in which the gift was made. Relatives can set up a 529 college savings plan and if they want to remove the money from their estate, they may contribute the equivalent of five years of the annual gift tax exclusion amounts that is currently $90,000 to each beneficiary.

The majority of 529 plans offer age-based portfolios and provide the contributor the opportunity to build their own portfolio. The main feature of an age- based portfolio is that the investment mix starts out with mostly stock mutual funds and as the time gets shorter before the beneficiary will need the money for college the investment mix becomes more conservative.  The idea is to be aggressive when the time horizon is many years away before the money is needed and then preserve what has been accumulated when the money will be needed soon. If an age based 529 plan is not offered by the sponsor of the plan you choose, you can basically duplicate the age-based approach with a mixture of quality mutual funds. 

  1. What State 529 Plan Should I Use?

The State 529 plans vary in the major areas of state tax benefits, the company used to manage the plan, the number and diversity of investment options.  The website has a link to a 529 Evaluator that can be used to compare different 529 plans. You do not have to set up the 529 plan in the State in which you live, or the beneficiary lives.  The funds in a state sponsored 529 plan in one state can be used for education expenses in any state.  A recommendation is that everyone should investigate the plan in their home state first to take advantage of any state tax breaks that may be available, but anyone may contribute to plans in any state.

  1. What is new in 2024 with 529 Plans?

Under SECURE Act 2.0, beneficiaries of 529 plans can receive a tax and penalty-free 529-to-Roth IRA rollover starting in 2024.  There are several conditions that must be met.  The rollover of the college savings funds to a Roth IRA is a good option if the beneficiary does not need the funds for higher education in the future. The conditions include:

  • Beneficiaries are allowed to roll over up to $35,000 over their lifetime into a Roth IRA in their name (not the original 529 account holder’s name).
  • This limit is subject to the annual Roth IRA contribution limit, which is $7,000 in 2024.
  • The 529 account must have been open for more than 15 years.
  • Funds cannot be rolled into a Roth IRA until 5 years after the funds were contributed or earned. 

In 2024, the gift tax limit has been raised from $17,000 in 2023 to $18,000. The gift tax is a federal tax imposed on transfers of money or property to other individuals when the giver receives nothing or less than full value in return. The Annual Gift Tax Exclusion is a set dollar amount an individual can give someone without needing to report it to the IRS. An individual must file a gift tax return if their gift exceeds the annual limit. Because contributions to a 529 plan are considered gifts, individuals can contribute up to $18,000 per year to a beneficiary’s 529 account without filing a gift tax return. Married couples filing jointly can contribute up to $36,000.

At Lydford Financial, we can assist you in navigating the new rules and opportunities for using the 529 plan savings in an effective manner. 

  1. What features have been added 529 Plans over the past few years?

The SECURE Act of 2019 allows beneficiaries of 529 savings plans to pay for student loan payments up to $10,000 over their lifetime. Since 529 plan funds do not expire, distributions can be used to pay for student loan repayments for beneficiaries or their siblings. 

 Qualified apprenticeship programs and their associated expenses are considered educational expenses and can be paid for with 529 plan distributions. 

 In 2017, a tax reform package expanded the benefits of 529 plan qualified expenses, including private school expenses for K-12 education programs. These qualified expenses are limited to $10,000, but they can be used to help pay for elementary, middle, and high school programs. 

The same 2017 reforms allow funds transfers from a 529 plan to a qualified 529 ABLE account, created by the 2014 Achieving a Better Life Experience (ABLE) Act. Americans with disabilities can save money for college and other expenses in a tax-deferred ABLE account to supplement private insurance and public benefits.

  1. How to Start Saving?

The first steps are to conduct some research regarding the highest rated 529 plans, determine how much it costs now for an undergraduate degree at your state’s universities, and find some money in your budget to begin saving as early as possible.  We can help you with the process at Lydford Financial where we are passionate about encouraging education for our youth and laser focused on identifying ways to fund your child’s, or grandchild’s future education needs.  There is no better time than now to start the process.  A 529 plan offers the best combination of flexibility, tax advantages, education related expenses covered, and investment options of any higher education saving option. 

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