529 plans offer an exceptional savings opportunity for families whose children are college-bound. They offer budding scholars with a way to build a nest egg for their education through a blend of mutual fund positions, all while enjoying tax-advantaged benefits. And if that wasn't enough, many states offer tax incentives for making 529 contributions—sometimes even allowing people to write off what they invest against their yearly income.
That's not all that 529s offer in terms of tax advantages, however. In fact, 529 plans offer compelling options for every investors' tax strategy. The account's flexible catch-up contribution terms, flexible rules about beneficiaries, and low penalties for non-qualifying contributions all create a strong complement to your existing tax preparation portfolio.
Whether you're setting up a 529 for the first time or are looking for tax-savvy investing strategies, here's what you need to know about how these plans can work for you.
The Wide-Reaching Benefits of 529s
529s are not just for college—they have a slate of benefits that can impact several members of the family both now and in the future. Better yet, these plans are not the exclusive domain of young scholars and their families: in fact, you can set up a 529 for anyone at any age, including yourself. This can come in handy in a number of ways. For example, you can use a 529 to help pay for qualifying continuing education classes and expenses, making it easier to follow your career path (or educational passions) as you see fit.
If there's money left over, or if your education plans change, you can always change the beneficiary to another family member to help fuel their future instead. Changing 529 plan beneficiaries is usually as easy as filling out a form and determining who you want the funds to go to.
Another major benefit to using a 529 is its newfound flexibility when it comes to paying for private K-12 education. Tax law changes in 2017 included a new provision that made these expenses eligible withdrawals or 529 plans, which means you can deposit money into an account and take out what you need in order to fund the plan's beneficiary along the way. Whatever is left over will continue to grow for when the days of secondary education give way to college classes.
Adding to the numerous benefits that 529s provide is just how easy they make it for friends, family, and loved ones to contribute. Most 529 plans include a straightforward method for third parties to deposit funds into an account—be it online through direct deposit or by mailing in a check. With 529s, you no longer need to collect birthday checks and earmark them for a college fund, making it easier to keep your account growing.
Knowing the Big Advantages
529s are a great option for education-minded savers, but the benefits of these plans don't stop there. In fact, there are sizable tax advantages within the 529 rules that can go a long way toward wealth transfer and estate planning, among other common concerns. Here are a few of the major tax-related advantages that 529 plans offer.
Most savers may already know that 529s grow tax-deferred for as long as there is money in the account. When it's time to make withdrawals, those that are considered to be "qualified expenses" come without federal income tax implications as well. Other non-qualified expenses are taxed as income and come with a 10% penalty. What's more, your deposits may even qualify for state income tax deductions as well, depending on where you live and what plan you've selected.
The 529 program has major benefits for estate planning and wealth transfer, too. Contributions count toward reducing your taxable estate, which can help offset some of the tax implications that often arise due to estate-related matters and gifting. These plans allow people to contribute up to $3,000 per beneficiary per year as well, which means it's easy to transfer wealth to beneficiaries over time and without major tax questions along the way. Since 529s can remain in your name or be transferred to another beneficiary with ease, these plans also provide more control than more traditional trust funds that restrict your ability to decide the terms of payment and administration.
If you're worried that it might be too late to take advantage of all the benefits 529s provide, fret not. Due to "accelerated gifting" rules, individuals who open 529 plans can contribute up to $75,000 per year, and couples can deposit $150,000 yearly toward these plans (assuming no other taxable gifts were made within the year). Plus, you won't be limited to one recipient with a 529, meaning you can establish several accounts with funds going to different people—all while allowing you to take advantage of the maximum gift tax exclusion within the same tax year.
Even if you're not looking for wealth transfer strategies with big tax benefits, 529s can help with other personal finance issues, such as retirement planning. These plans offer retirees a place to park minimum required retirement distributions without being taxed on funds they may not necessarily need to have as liquid income. This is a great way to reduce your tax burden while investing for your family's future.
529s Are the Unsung Heroes of Estate, Tax, and Education
529s may not get the same kind of attention or interest from investors as other high profile vehicles, but 529 may lack in pizzaz they make up in steady returns and unparalleled tax flexibility. Most states offer self-directed and managed plans, making it easy to manage your own money or leave it to a financial professional. And for as long as your account is active and funded, you can make withdrawals for qualifying expenses—even if they're not explicitly aimed at college-related expenses.
The high tax-free deposit limits, generous catch-up contribution rules, and flexible designee changes all make 529s the unsung hero of wealth transfer strategies as well. Non-qualifying withdrawals come with a flat 10% penalty, versus estate taxes that begin at 10% and increase depending on the amount of money being transferred. If you're thinking about shorter-term tax planning, state-by-state rules about 529 contributions counting as income deductions also make it beneficial to open and fund an account. Some states even recognize out-of-state plans for deductions, giving you even more control to pick the right plan for you.
No matter the reason for opening a 529 plan, there are tons of great reasons to get the process started today. With a 529, you can rest easy that you're investing for the future while enjoying tax-friendly perks along the way. That alone can help take the sting out of the ever-increasing price tag of higher education.