529 Plans: Benefits & Limits
With the spring semester winding down, we wanted to share some reminders and information about 529 plans and how you can get the most out of your college savings plan!
What is a 529?
A 529 is a qualified tuition plan, also referred to as an education investment account. These plans are state-sponsored, and each state has its own rules and guidelines. However, you do not have to be a resident of that state to have an account, meaning you can use any state’s plan to house your funds. Some states offer a tax benefit for in-state contributions, but if your state does not (North Carolina no longer does), you can shop around and pick another state’s plan based on your needs.
Fun fact: Since North Carolina no longer offers tax deductions for 529 contributions, WFA recommends Utah's 529 plan (called my529) because of their more diversified investment options and low fees!
529 plans were originally created for college savings, for you to put money away when your children or grandchildren are little, allowing it to grow tax-deferred, and for them to use it tax-free for college expenses. Additionally, the Tax Cuts and Jobs Act of 2017 expanded the use of 529 savings plans, so they can now also be used for K-12 costs. You can withdraw $10,000 tax-free annually for expenses at private elementary and secondary schools.
Benefits of a 529 Plan:
Besides the ability to put away money designated for college or other education expenses, 529 accounts also provide a tax break. The money in a qualified tuition plan can be used tax-free for qualified education expenses, which include tuition and fees, room and board (even if your child lives at home), books, computers, etc. These earnings grow federal and state tax-free, increasing the benefits of starting an account early to allow it the most time to grow!
Woodward Financial Advisors can not only help facilitate the opening of your 529 plan under our management, but we have also created age-based portfolios and other pre-determined portfolios to make the investing process customizable to your goals. There are also no income-based restrictions for 529 plans, meaning anyone can open an account and start saving for education.
529 plans are also very flexible! There is no time limit to using the funds you saved in a 529 account, meaning the money is not “use it or lose it.” The funds can be used for different types of education expenses, like private elementary and secondary school, as mentioned above, as well as trade school or graduate school. This flexibility also allows the savings to be used for “non-traditional” education paths. You can also change beneficiaries on a 529 account to another family member, further increasing the ability to use the funds you saved!
Many parents are worried about saving too much in a 529 and not using the funds. Two interesting rules related to this are: if your child or grandchild receives scholarship money, you may take the equivalent amount out of their 529 plan penalty-free. Also, starting this year, a new law goes into effect that allows 529s that have been around for 15 years to do annual 529-to-Roth IRA Rollovers with a lifetime maximum of $35,000. That is a huge benefit for leftover dollars!
Limits to a 529:
While there are many benefits to a 529 plan, there are a few limitations or penalties. For example, while there are no taxes if you use the money for qualified education expenses, non-qualified withdrawals will incur a tax penalty. The withdrawals will be subject to federal and state income tax in addition to a 10% federal income tax penalty on earnings. While this isn’t ideal, it allows you to access your 529 dollars for non-educational expenses.
Finally, while there are no income limits to contribute to a 529 account, there is an $18,000 max contribution per beneficiary/per donor/per year. So, a couple could contribute $36K per year. Additionally, contributions can be front-loaded, and the gift tax is averaged over five years. Parents or grandparents could donate five times their gift tax limit -- $180,000 for a couple – and average that gift over the next five years. Any money added beyond the scope of these rules would need to be classified as gifts to the IRS. As you can see, these have been set up to encourage the use of these flexible, tax-advantaged investment vehicles.
How Woodward Financial Advisors Uses 529:
Some of our clients use NC 529, which is the 529 plan for the state of North Carolina. However, as a firm, we use Utah 529 for the accounts that we directly manage. Since there are no tax deductions for North Carolina's 529 contributions, we use Utah’s plans for their wide variety of investment options and low fees!
While the plan Woodward uses is called “Utah My529,” there is no difference between the benefits and perks of a Utah 529 and North Carolina 529 (or any other state). Additionally, you can " roll over” an existing 529 tax-free from one plan to another!
For existing 529 plans, WFA can help with investment recommendations based on your situation. For new accounts, we can help set it up, link your bank account for contributions, invest the dollars, and facilitate withdrawals.
If you or your family does not already have a 529 plan in place, reach out to your advisor today to get started and learn more about the benefits!
https://www.forbes.com/advisor/student-loans/benefits-of-a-529-plan/
https://www.usbank.com/wealth-management/financial-perspectives/financial-planning/using-leftover-529-funds.html