529 Tax Benefits: A Great Way to Save for Education
Holly Wanegar, CFP®
Associate Vice President & Wealth Advisor
If you’ve got children, tax season is actually a great time to strategize on how you can maximize savings for their education. Why? Because leveraging a 529 college savings plan could offer the opportunity to divert money you might otherwise pay into taxes toward your child’s college savings fund instead.
A 529 Plan is a tax-advantaged savings account designed specifically for education costs. Here’s a look at the account’s key tax benefits, and some smart strategies for maximizing your 529.
What is a 529 Plan?
529 plans are investment accounts sponsored by states and managed by financial institutions. When you contribute to a 529, your money grows tax-deferred, and distributions are tax-free when used for qualified education expenses like tuition, fees, books, supplies, computers, and room and board.
There are two main types of 529 plans: savings plans, which are more conservative investments like CDs, and prepaid tuition plans, which lock in future tuition rates at in-state public colleges. Both offer valuable tax perks, but bear in mind that the prepaid tuition plan is not available in all states and limits the flexibility to a specific college or university.
Major Tax Advantages
Tax-Deferred Growth - The money you contribute grows tax-deferred. Unlike a regular investment account, you don't pay taxes on the account's earnings each year. This enables more efficient growth. Distributions are 100% tax-free when used for qualified education expenses. This includes tuition, fees, books, supplies, computers, and now up to $10,000 per year for K-12 tuition.
State Income Tax Deductions - Over 30 states (including Connecticut) offer a state income tax deduction for contributing to your own state's 529 plan. For example, a $5,000 contribution would lower your taxable income by $5,000.
Estate Planning - Money in a 529 is considered an asset of the account owner, not the beneficiary. It can be a smart way to make large gifts without gift tax issues.
Flexibility - You can change the beneficiary to another eligible family member without penalties. Recent legislation now allows unused funds, up to $35,000, to be rolled over to a Roth IRA for the current beneficiary if the plan has been under the beneficiary's name for at least 15 years. Bear in mind that the beneficiary can only roll over up to the maximum annual Roth IRA contribution limit each year, and the lifetime rollover limit is $35,000 per 529 account beneficiary.
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Maximizing Your 529
Here are some savvy strategies to make the most of a 529's tax perks:
- Front-load contributions with up to 5 years of the annual gift tax exclusion amount at once. This accelerates tax-deferred growth.
- Take advantage of your own state's income tax deduction if available.
- Name yourself as account owner and your child as beneficiary. You remain in control of the funds, but they are excluded from your taxable estate.
- Consider an aggressive investment strategy when your child is young to maximize tax-deferred growth. Then gradually shift to a more conservative investment strategy as college nears.
- Use 529 funds to pay student loans (up to $10,000 lifetime) or apprenticeship costs to take advantage of tax-free withdrawals.
- For unused funds, elect to change the beneficiary or roll over up to $35,000 into a Roth IRA to protect the tax deferred growth and reallocate the funds towards retirement savings.
529 plans offer unique tax advantages that make them one of the best college savings vehicles available. Following smart strategies can help you maximize their benefits and watch your education funds grow, while also potentially helping to reduce your tax burden. These kinds of comprehensive financial life strategies are what we’re focused on at WHZ, through our Plan Well. Invest Well. Live Well.™ strategic financial planning process.
Wondering if you have (or will have) enough saved for your child’s education? Use the college planning calculator on our website to start and get in touch with us for a complimentary consultation to see how our process can support your college savings, tax savings, and retirement savings strategies to help you achieve your financial life goals and ultimately Live Well. Call (860) 928-2341 or book a consultation on our website.
Authored by Associate Vice President, Wealth Advisor Holly C. Wanegar, CFP®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084. 860-928-2341. www.whzwealth.com.
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