As a parent planning for your child’s college education can be hard, especially when you are unsure where to start. Thankfully there is a state sponsored plan called the 529 education plan. This plan can also be referred to as a 529 QTP (Qualified Tuition Plan). This is a great plan for parents, guardians, or even grandparents to help pay for a higher education for their child.
The 529 plan is a State sponsored plan that allows the for after tax contributions to be made to the savings plan. This plan is typically set up on behalf of the parent, guardian, or grandparent for the child. The plan has many different uses and ways that it can be set up. There are two different types of 529 plans the prepaid tuition plans and the college savings plan. In this article we are going to focus on the college savings plan.
Setting up a 529 can be done by anyone however there are stipulations when it comes to contributions and withdraws. While other education saving plans such as the Coverdell Education Plan allows you to contribute up to $2,000 a year, the 529 QTP has a much higher annual contribution limit those being $235,000 to $425,000. These are just the limits and are not practical for everyone. That being said these accounts can allow for larger contributions without any limit. A good tip when contributing to a 529 is to be mindful of the gift tax exemption. For 2022 the limit is up to $16,000 per year. The gift tax exemption is an amount that can be “gifted” from one person to another without being subject to tax. Once you gift more than $16,000 you are going to be taxed. That being said any contributions to the 529 under the gift tax limit aren’t subject to the gift tax.
The way that the 529 savings plan grows is based on a set of investments inside the plan. Same goes for the 529 however these funds are to be used for the beneficiary. Typically as the plan first starts out it will be in more growth investment vehicles such as various stocks and equity etf’s. As the beneficiary gets older and nears withdraw, you may want to switch to a safer investment such as bonds. The reason you might want to do this is because it will allow for the funds to be safe and not subject to swings in the market when you need them most.
529 savings plans are unique that they are eligible for any state. Meaning that there is no restriction on where the funds can be used even if the beneficiary decides to attend school out of state. The main purpose for the 529 savings plan is to help pay for the beneficiary’s schooling. These funds can be used for room and board, tuition, and any other expenses related to the classes they are attending. These distributions from the 529 can be used by the beneficiary and are not considered income if they use the funds for these higher education expenses. However if the beneficiary decides to take a distribution to make a purchase for a car the funds will be taxed as ordinary income as well as a 10% withdrawal penalty.
What do you do if the beneficiary decides he or she doesn’t want to pursue higher education? The funds can be rolled over or transferred to a different beneficiary. The stipulations are that this new beneficiary must be related to the original beneficiary. That includes:
· Child · Sibling/step-sibling · Parents · Stepparents · Niece · Nephew · Aunt · Uncle · In-law · First cousin · Spouse
529 educational savings plans are a great way for parents or guardians to help save for their children’s higher education in the future. With the ability to grow the funds tax free, the ability to switch beneficiaries if need, and the ability to withdraw funds for qualified higher education expenses. The 529 savings plan can be a great tool to help secure funding for your child’s higher education.
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