BACKGROUND INFORMATION
529 plans allow taxpayers to save larger amounts of money
than other tax-advantaged education savings plans do. They are limited only by the contributor’s
gift tax concerns and the contribution limits of the intended plan. There are no limits on the number of
contributors and there are not income or age limitations. The maximum amount that ca be contributed per
beneficiary (the student) is based on the projected cost of college education
and will vary by the plan of each state.
Most have limits in excess of $200,000 while others are over $370,000. Generally additional contributions cannot be
made once the account’s balance reaches your state’s maximum level, but that
doesn’t prevent the account from continuing to grow.
Although the plans are authorized by the various states, it’s
not required that the plan be set up in the future collegian’s home state. Additionally, the student is not restricted
to using the funds in either his or her home state or the state where the plan
was set up. Some states, however, do
provide state income tax deductions as an incentive to get their residents to
set up plans in the state. These
incentives typically come as a state income tax deduction or a tax credit for
the contributions to the state’s 529 plan.
When the times comes for college, the distributions will
partially be earnings in value and partially from contributions. The contributions are never taxable. The earnings part is tax free if they are
used to pay for qualified education expenses like tuition, fees, and books. In addition to the tax-free distribution from
the 529 plan, the taxpayer may claim and education credit such as the American
Opportunity tax credit, which can be as much as $2,500 ($1,000 of which is
refundable!).
The big advantage of s section 529 plan is the tax-free
accumulation of funds so it is best to establish and fund one as early as
possible in the child’s life. There is a
special provision that allows those concerned with the annual gift tax limit
(currently $15,000) to contribute five years’ worth ($75,000) up front. This limit is per contributor. If there are multiple contributors (parents,
grandparents, godparents, aunts, uncles, etc., huge amounts can be contributed
up front and provide considerable long-term growth.
Keep in mind, however, that saving through a 529 owned by
the parents means that you are accumulating your college savings in a vehicle
that is considered an asset and will be factored into need based financial
eligibility calculations by the FAFSA processor. It will also be considered, as long as the student is the beneficiary, no matter who the owner is, by the schools utilizing the CSS PROFILE financial aid application form.
TAX REFORM CHANGES of 2018
As of 2018, tax free distributions of up to $10,000 per year
per beneficiary are allowed for tuition for elementary or secondary
schools. Of course, using the funds for
K-12 education leaves less for college
education. This will especially impact
those families not able to front load the 529s since the monies won’t be able
to grow over the years. This is a change
to federal law; please check with your tax preparer regarding limitations your state
may still have. Some still restrict 529
distributions to use for college expenses.
The tax reform also allows the distribution from a 529 to be
tax and penalty free if it is rolled over to an ABLE account for the same
beneficiary (or a member of his/her family) within 60 days of its
distribution. This rollover provision is
only available until 2025. The rollover
amount is limited, when combined to other contributions, to the annual maximum.
In case you’re not familiar with them, qualified ABLE programs
provide the means for people to save in order to support individuals who became
blind or severely disabled before their 26th birthday. This support is to maintain their health,
independence, and quality of life.
Please contact your tax preparer for additional information.
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