The 529 College Savings Plan

Presented by Robert E. Tubridy ., CFP®, MBA, ChFC®

 

This past June, my son Jack (A rising Junior) and I had the opportunity to begin our college search in Washington DC. Our family, like many of our CT Financial clients, face a complicated road when trying to decide on a school for our children. So many factors to consider. What's the right location? What is the correct school size? What undergraduate majors are available?Bob Tubridy (right) and his son, Jack Tubridy, visited Washington DC in June, 2018.

On the financial front, the cost of college is steadily rising, and student loan debt has reached crisis status. What does this mean for you? It is more important than ever to commit to saving for the education expenses of the future scholars in your life. The most common way to save for college expenses is with a tax-advantaged, state-sponsored 529 Plan. The 529 Plan gets its name from section 529 of the Internal Revenue Code (IRC). This plan is operated by a state or educational institution and is designed to help families set aside funds for future college expenses.

Anyone can establish a 529 plan for the benefit of whomever they choose, as there are no income, age, or annual contribution limits. If you invest in your state's sponsored 529 plan, you may be eligible for a state tax deduction or credit for 529 plan contributions. As the donor of a 529 plan, you remain in control of the account and can ensure that the money will be used for its intended purpose. You also retain the right to withdraw funds from the plan at any time, for any reason, and to change the beneficiary.

Earnings in a 529 plan grow Federal Tax free, and will never be taxed as long as the money withdrawn is used for “qualified” higher education expenses, which includes tuition, room and board, fees, books, and equipment. Distributions not used for qualified higher education expenses are allowed but are subject to federal income tax plus a 10-percent penalty. Taxes and penalties apply only to earnings in the account.

With passage of the Tax Cuts and Jobs Act of 2017, parents who send their children to private elementary and high school will have more options when it comes to saving for tuition. The GOP tax bill now allows up to $10,000 in distributions per year from 529 plans to help parents pay for K-12 tuition expenses.

Bottom line? The 529 plan has a low impact on The Free Application for Federal Student Aid (FAFSA). 529 plan balances are counted as an asset of the account owner, not of the beneficiary. Its never too early to prepare your child or grandchild for a successful future. No matter what their age. With the rising costs of college education, the time is now.

 

The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee a college-funding goal will be met. Earnings must be used to pay for qualified higher education expenses to be federally tax-free. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10-percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.