As the costs of education continue to increase at exorbitant rates, helping your loved ones save for college is one the best ways to help them secure a bright future. Setting up a College Savings Plan, commonly known as 529 plan, is one of the best options for achieving this goal.
Here are the key benefits of using a 529 plan:
Tax Advantages: Earnings in a 529 plan grow federally tax-deferred, and no federal or state tax is imposed on distributions used to pay for qualified expenses, which are relatively broad. Contributions made to 529 plans qualify for gift tax exclusions up to the annual gift tax exclusion amount (currently $17,000) and front-loading your 529 plan allows you to contribute five times the annual gift limit in one year without incurring gift tax liability. Many states also offer state tax advantages for their 529 plans, including tax deductions or credits for contributions made to 529 plans.
Plan Flexibility: You have the flexibility to choose a 529 plan from any state, regardless of residency or the beneficiary's school location. State plans differ in their investment options, fees, performance, and state-specific tax benefits, allowing you to select the plan that best suits your specific needs. Within your chosen state's plan, you also have the flexibility to customize the portfolio based on your risk tolerance. Target date/age-based portfolios are an effective choice that automatically adjust to a more conservative allocation as the beneficiary approaches college age.
Benefits from New Legislation: Recent legislative changes from the Tax Cuts and Jobs Act, SECURE Act, and SECURE 2.0 Act, have made 529 plans even more advantageous. 529 plans are now more flexible as far as qualified expenses, which now include private K-12 tuition and paying back student loans. Up to $10,000 can be withdrawn per year from 529 plans to fund private elementary and secondary school tuition expenses, and a lifetime maximum of $10,000 per beneficiary can be withdrawn for student loan repayment. The risk of overfunding your plan, necessitating non-qualified withdrawals, has also been reduced: beginning in 2024, up to $35,000 can be rolled over from a 529 plan into the beneficiary's Roth IRA.
The cost of higher education has been rising at nearly twice the rate of inflation for other goods and services, necessitating a proactive approach to saving for college. Consider asking your financial adviser the following questions to find a 529 plan that fits your specific financial situation:
Based on my specific financial situation, which state's savings plan would you recommend I contribute to?
Considering my risk tolerance and portfolio timeline, would you suggest using an age-based or static portfolio for my 529 plan?
Should I consider front-loading my 529 plan? What other actions can be taken to optimize my plan's tax advantages?
By guest writer Amelia Gibbs, Intern