May 29th (5/29) is 529 Day! Although arguably not as exciting as Pie Day or Dog Day, it’s an excuse to talk about the importance of planning and saving for college, namely through 529 plans. Despite it being a seemingly simple savings vehicle, there are a number of things to consider before opening an account. If you have any young people in your life whose education you would like to help save for, following are some answers to the most common questions when it comes to 529 plans.
What are the advantages to a 529 plan?
There are four distinct advantages to opening a 529 plan:
- Your investment grows tax-deferred and qualified distributions are not subject to federal tax and in most cases state tax.
- As the donor and owner, you have complete control of the account.
- 529 plans are easy, convenient, and flexible compared to other education savings options.
- There are no income limitations or age restrictions.
What is a qualified distribution?
In all states, tuition qualifies as an eligible expense, and most states also permit funds to be used for room, board and books. In certain states (Washington included), funds may also be used for tuition for private elementary and high school. At the time of this writing, Oregon does not allow this, but should the rules change, we will be sure to inform our Oregon clients.
How much can I contribute annually?
For 2021, you can contribute up to $15,000 per year ($30,000 for a married filing joint couple) without incurring gift tax. There is also an option to fund up to five years at once.
What if the beneficiary chooses not to attend college?
There are ways to avoid a penalty if the 529 plan beneficiary doesn’t go to college. The easiest option is to change the beneficiary to a different individual that does intend to go to college or incur qualified educational expenses such as for vocational type schools or community college classes. Ultimately, if the funds cannot be used for a qualified expense and are distributed for another use, only the earnings portion of the plan is subject to income tax and a 10% penalty.
In general, if you live in a state that offers tax advantages to investing in that specific state’s plan, it’s best to use that plan. However, the costs for each state’s plan and tax deductions and credits change frequently, so please reach out if you have any questions or would like a recommendation.