529 Plan Benefits: An Education for Your Student, Tax Breaks for You
With the pace of higher-education costs rising faster than the general Consumer Price Index (CPI), it's easy to understand why saving enough money to fund a child's college education has become a financial challenge for many parents and grandparents. The numbers tell the story: The first-year college tuition bill in 2020 is projected to be $32,803 for an in-state average public education institution and $66,036 for an average private institution.* So whether college for your child or grandchild is years away or right around the corner, put time on your side — consider the benefits of contributing to a 529 plan for a student (beneficiary) in your family.
Made possible by federal legislation, 529 plans (named after section 529 of the Internal Revenue Code, 26 U.S.C. §529) are implemented at the state or institution level. Nearly all states have approved and adopted these qualified tuition assistance programs. Most states let nonresidents participate in their plans, although the tax benefits may be greater for residents than for non residents.
The student can use 529 plan account balances at any participating accredited postsecondary school in the United States or certain schools abroad for tuition, room and board, books, equipment, and supplies. Qualified expenses also include computer technology, related equipment and Internet-access costs.
As the owner, you retain control of the assets and can change beneficiaries within the designated student’s family at any time without penalty. A qualified family member generally includes siblings, descendants, ancestors, aunts, uncles and first cousins. Other key advantages of these plans include:
Federal-income-tax-free qualified distributions. The student may be able to take qualified distributions federal-income-tax-free.
No income limitations for participation. There is no income limit for contributing to a 529 plan, which is a benefit for higher-income families.
Substantial contribution amounts. Contribution limits are significantly higher than those allowed for other education savings plans. Maximum account balance limits vary from state to state.
Significant estate-planning benefits. A single person can contribute up to $65,000 in one year per beneficiary; a married couple can contribute up to $130,000 in one year per beneficiary with no gift-tax consequences. Such a contribution will be considered a five-year accelerated annual-exclusion gift, so no additional gifts can be made for that beneficiary for the next four years without incurring gift-tax implications unless the annual exclusion gift increases. The gift amount and subsequent appreciation, however, are removed from your taxable estate. (A portion of the contribution amount may be included in the donor’s taxable-estate calculation if the donor should die within the five-year period.)
No burden of investment decisions. The plan's chosen investment manager will be responsible for portfolio management of all contributions. Initially, some plans may let you select from several asset-allocation-model alternatives, which generally may be changed once every calendar year and/or with a beneficiary change.
If for some reason the account balance is not used for qualified higher education expenses, every withdrawal from a 529 plan is separated into two components: an "earnings" portion and a "return of your investment" portion. If a withdrawal is not used for qualified higher-education expenses, the "earnings" portion of the withdrawal is subject to federal income tax and potentially a 10 percent IRS penalty. The "return of your investment" portion in the 529 plan is never subject to federal income tax or IRS penalty. (State laws regarding taxes and penalties can vary from state to state, however, and may apply; you should always check with your tax professional before making this type of withdrawal.) If the beneficiary dies, becomes disabled or receives a tax-free scholarship, you may take penalty-free withdrawals from the 529 balance within that same calendar year.
Keep in mind that 529 plan investment balances may affect eligibility for financial aid:
• If a parent owns the 529 account, up to 5.64 percent of the value is included in Expected Family Contribution (EFC) as a parental asset. Any 529 accounts owned by a dependent student, or by a custodian for the student, are reported on the Free Application for Federal Student Aid (FAFSA) as a parental asset. Any qualified withdrawals from these accounts are not included as income to the student.
• If a 529 account is owned by a grandparent (or someone other than a parent or the student), the value of the 529 plan is not reportable as an asset on the FAFSA.
However, any distributions from these third-party accounts are considered financial support to the student and are reportable on the following year's FAFSA as student income. Student income is assessed at the student's rate of 50 percent.
There are many 529 plan choices — discuss college-funding alternatives with your financial adviser and choose the one that best fits your needs.
An investment in a 529 plan will fluctuate such that the shares when redeemed may be worth more or less than the original investment. There are no guarantees that an investment in a 529 plan will cover higher-education expenses. Investors should consult the plan's offering document for the fees and expenses associated with that plan. You should consider a 529 plan's investment objectives, risks, charges and expenses carefully before investing. The plan's official statement, which contains this and other important information, should be read carefully before investing.
* Total yearly costs for in-state tuition, fees, books, room and board, transportation, and miscellaneous expenses. Base is 2009-2010 school year. Costs for 2020 projected by Wells Fargo Advisors in October 2009 assuming a 5.4 percent increase per year. Source: Trends in College Pricing. ©2009 collegeboard.com Inc. Reprinted with permission. collegeboard.com. All rights reserved.
As Wells Fargo Advisors does not render tax advice, you should consult with a tax adviser before making any investment decisions which could have tax consequences. This article was written by Wells Fargo Advisors and provided courtesy of Jonathan Buoni, financial adviser, in Springfield, Mass., at 413-755-1171.
Tags: college costs, college savings, financial planning, IRS,
