It’s 529 Day!
As higher education expenses continue to skyrocket, May 29th has become the official day to raise national awareness for one of the most popular ways of saving for college: 529 Plans (so clever…May 29 = 5/29). These plans help you manage future tuition and other costs associated with higher education. But what exactly are they all about? That’s where we can help. Read on to learn everything you need to know to decide whether or not these plans are right for you.
What is a 529 Plan?
Named for Section 529 of the Internal Revenue Code, 529 plans are state-run, tax-advantaged methods of saving for higher education; 529 plans consist of two options: (1) education savings plans, and (2) prepaid tuition plans.
The education savings plan allows you to open an investment account for a beneficiary – typically your child – but technically it can be for anyone (even yourself!). Money inside this account can be invested in stock and bond funds, though you are limited to the options provided by your state’s plan (similar to how your 401k works). Once the child goes to college, you can then use it to pay for qualified expenses tax-free.
Prepaid tuition plans, on the other hand, enable you to buy “tuition credits” for public, in-state colleges at their current price, which are then “cashed-in” tax-free when the beneficiary attends college. If your child ultimately attends a private or out-of-state institution, the credits can still be applied albeit at a discounted price, meaning you will have to cover the difference out of pocket. Note, due to soaring tuition costs the state of Virginia has temporarily shut down its prepaid plan to new applicants; other states may likely do the same.
You may have also heard of 529 ABLE accounts, which are similar to college savings plans. However instead of higher education expenses, 529 ABLEs cover qualified expenses for disabled individuals. We will cover 529 ABLEs in more detail in a later blog.
Advantages of 529 Plans
1. Savings grow tax-free. You never pay taxes on investment earnings, nor on money you withdraw for qualified expenses. If you take out money for non-qualified purposes, it will be taxed along with your other income, plus an extra 10% penalty. Examples of qualified expenses are tuition, books, and room & board. Examples of non-qualified expenses are extra-curriculars and travel to and from the college (i.e. you can’t use a 529 to pay for plane tickets to send your kid back to school). For more information, check out this chart of qualified education expenses. As technology and the higher education landscape change, more costs may attain qualified status. For example, computers were added in 2015 since they are an essential part of receiving an education today.
2. You can invest in any state’s plan. You do not have to live in the corresponding state. Virginia has the largest plan out there, so you can take advantage of it regardless of where you live. Click here to learn more about Virginia’s plan.
3. Virginia’s plan offers a tax deduction for residents. If you are a Virginia resident and contribute to a 529 account, you can deduct up to $4,000 per account from your taxes for contributions made during the year. Many other states offer this perk, so if you don’t live in Virginia research your state’s rules.
4. You don’t even have to think about it. These plans are a simple, easy way to save for college. You can even set up automatic recurring contributions from a checking account.
5. Anyone is eligible. There are no age or income limits unlike other college savings vehicles such as Roth IRAs and Coverdell Education Savings Accounts. Note, due to gift tax rules there are limits on how much you can save in the account each year (and in total). Check with your tax advisor to see if this impacts you.
6. The donor has exclusive control. The funds are yours alone – meaning you get to decide how and when money is disbursed, unlike other accounts such as UTMAs that become the legal property of the child at a certain age (usually 18). With 529s, if the beneficiary does not go to college the account owner can just change it to another child tax-free. Worst case, if none of your kids attends college you can always take the money back (albeit with taxes and a penalty), or even save it for a future grandchild down the road.
529 plans can help students receive a higher education. Tax-free growth, flexibility, and the many other benefits make it nearly a no-brainer. However, you should still research different state plans and what they have to offer. Which type of plan, education savings or prepaid tuition, will work best for the beneficiary? Consider which colleges and universities participate in prepaid plans. It’s not something to be entered into lightly, but it can help you manage your child or other beneficiary’s educational future.
Need more information on how to get started? Reach out to us today!
Taylor Hoffman is an SEC registered investment adviser with its principal place of business in the State of Virginia. Any references to the terms “registered investment adviser” or “registered,” do not imply that Taylor Hoffman or any person associated with Taylor Hoffman have achieved a certain level of skill or training. Taylor Hoffman may only transact business in those states in which it is registered /notice filed, or qualifies for an exemption or exclusion from registration /notice filing requirements. For information pertaining to the registration status of Taylor Hoffman or for additional information about Taylor Hoffman, including fees and services, please visit www.adviserinfo.sec.gov.
The information contained herein is provided for informational purposes, represents only a summary of the topics discussed, and should not be construed as the provision of personalized investment advice or an offer to sell or the solicitation of any offer to buy any securities. The contents should also not be construed as tax or legal advice. Rather, the contents including, without limitation, any forecasts and projections, simply reflect the opinions and views of the author. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change without notice. There is no guarantee that the views and opinions expressed herein will come to pass.
This document contains information derived from third party sources. Although we believe these third party sources to be reliable, Taylor Hoffman makes no representations as to the accuracy or completeness of any information derived from such third-party sources and takes no responsibility therefore.