Woman on laptop researching tax advantages of 529s as part of her estate planning.

Simple Estate Planning and Tax-Advantages for 529s


Learn about the tax advantages of a 529 account and how it can help you set aside money for higher education purposes while reducing your taxable income.

With the cost of college education seemingly always on the rise, it can feel as though even the most fastidious efforts to save for college may not be as much as you'd like. If you're looking for new ways to help pay for higher education with tax advantages, and haven't set up a 529 plan yet, then you might be missing out. 529s allow savers to put away money for education while reducing their taxable income. Plus, 529s are easy to set up, manage, and fund—whether you're putting money away for yourself, a family member, or looking to help another budding scholar fund his or her educational pursuits.

Even if you're a 529 expert, there are advantages to these savings plans that many people might overlook. This is particularly true with regard to taxes, estate planning, and wealth transfer strategies. A well-funded 529 plan can make it easier for account holders and beneficiaries to transfer cash without many of the restrictions that come with irrevocable trusts, or the high estate tax rates found in most states.

Whether you're looking to increase your nest egg for college education, want a tax-advantaged way to pay for K-12 education, or want to incorporate alternative strategies into your estate plan, 529s can do it all. Here's the lowdown on what 529s can do for you and your personal finances.

How to Use 529s to Your Advantage

One of the biggest misconceptions about 529 plans is that they're just for parents to help save for their child's college education. After all, 529 plans do provide plenty of benefits for college savers, such as tax-free withdrawals that are used for qualifying educational costs. But there are other unique advantages these accounts provide for savers and students alike; many of which go beyond paying for tuition, books, or room and board.

529s offer unique advantages for almost everyone's investment portfolio. For starters, 529s are easy to set up and offer tons of investment options from which to choose. Most states offer both self-directed and managed plans, meaning you can control as much (or as little) of your investment strategy as you wish. Plans usually include several investment strategies as well, ranging from conservative to aggressive holdings depending on your appetite for volatility. Your investment will grow tax-deferred for as long as your money stays in the 529, too.

When the time comes to withdraw funds from your 529, you'll have a variety of qualified and tax-free expenses from which to choose. Account-holders and beneficiaries can withdraw funds for K-12 education due to tax law changes in 2017, for starters. Other qualifying expenses include continuing education classes from qualifying institutions and post-graduate education in addition to the usual college expenses that 529s help cover.

How 529s Can Go Beyond Education Costs

529 plans provide plenty of flexibility for tax-free saving and college affordability in general, but that's only the beginning of what these plans can do. When compared to irrevocable trusts, major gifts, and estate planning tactics, 529s can give account holders a greater degree of flexibility and—in some cases—more advantageous methods of wealth transfer to beneficiaries.

When compared to irrevocable trusts, 529s offer more benefits and more control. Trusts tend to be complex and expensive to set up, and they limit your ability to control the funds you place into them after they've been set up. By contrast, 529s allow you to contribute comparable amounts of money as irrevocable trusts, but enable you to control your investments and beneficiaries—all while growing your money tax-free and lowering your taxable estate.

Retirement means major financial changes, not the least of which being mandatory distributions from retirement savings plans. By setting up and funding a 529 plan (or several plans with different beneficiaries), you can park these distributions in a tax-free savings account, which is a welcome tactic for those who may not need the additional funds and would otherwise like to avoid the additional taxable income they create. Plus, you'll be helping fund your family's education, creating a valuable investment in the future that goes beyond dividends.

The Other Big Tax Advantages 529s Provide

Comparing the benefits of 529s and irrevocable trusts is only the tip of the iceberg in terms of how 529 plans can make estate planning easy and tax-advantaged. In fact, there are several other strategies relating to 529s that you may want to discuss with your financial team—many of which offer savvy ways to bequeath your estate to your family.

529 plans offer a unique option for people looking for a tax-advantaged estate planning strategy. The program currently allows new 529 account holders to make catch-up contributions, totaling up to $150,000 a year per 529 account for married people filing jointly. This accelerated gifting program is designed to account for five years' worth of contributions, but can be made all at once and is still exempt from gift taxes.

For example, a married couple filing jointly can contribute $450,000 in a single year through gifts without getting hit with taxes, so long as the funds are divided into three separate 529s, going to three different beneficiaries, with deposits of $150,000 each. Plus, these contributions count toward lowering your taxable estate, even though you retain control over who is entitled to the money set aside in the plan.

Even if your 529 plan beneficiaries end up not needing some or all of the funds set aside in the account, they can still access the money therein—albeit with a catch. Any non-qualifying withdrawals are subject to income tax as well as a 10% penalty. This penalty, however, is a flat 10% fee. By contrast, most estate taxes are progressive, which means a beneficiary could end up owing less money by way of the 529 penalty than they would through traditional gifting. This can go a long way toward getting the most out of your estate plan, all while helping your family prepare for the future in any form that might take.

The closer you look at 529s, the more attractive—and versatile—they appear. What is often thought of as a somewhat tame method of saving for college actually provides a slew of advantages for your portfolio, estate planning goals, and wealth transfer requirements. With the right strategy and professional guidance, you can unlock some of the lesser-known advantages of 529s, and reap benefits that go far beyond a diploma.

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