Almost everyone wants to contribute financially to their children’s or grandchildren’s education, according to The Hartford’s fifth annual college savings survey. However, only 64 percent of respondents are aware of tax-efficient ways to save. With many college saving options available, determining which ones are best for you and your family can be confusing.
529 education savings plans are a great option for tax-advantaged savings. A 529 plan allows you to make investments with earnings that are tax-exempt when they are applied toward eligible higher education expenses.
If you are in the process of developing a college savings plan for your children or grandchildren, it’s always a good idea to talk to your financial advisor. If you’re confused about college savings options, particularly about 529 education savings plans you are not alone. The Hartford survey found that 43 percent of parents and grandparents don’t fully understand this investment tool. Before you talk to your advisor, here are the answers to some frequently asked questions about 529 plans.
How much can you contribute to a 529 education savings plan?
Many states allow the account owner to take a state income tax deduction for contributions made to their plan each year. The amount of the deduction varies by state, and if you roll the funds to another 529 plan not sponsored by that state, your deduction may be subject to recapture.
Under federal gift tax rules, you can contribute up to $13,000 per year for each beneficiary of a 529 account without gift tax consequences. You can also make a tax-exempt contribution of $65,000, or $130,000 for married couples, per beneficiary, once every five years. If you treat the gift as being made over five years, and die before the end of the five year period, the portion of the gift allocatable to the period after your death will be included in your estate. Any additional gifts given by you to the same Designated Beneficiary in the five year period will be subject to federal gift tax. You should consult with your tax advisor for more information.
The earnings would be treated as ordinary taxable income and could be subject to a 10 percent federal income-tax penalty. Such withdrawals may also have state income tax implications. Certain exceptions are allowed. For example, if your child earned a scholarship and didn’t need the funds to pay for college, withdrawals in the amount of the scholarship would likely come without penalty.
The account owner has complete control over how contributions are invested and when withdrawals are made.
Who can contribute?
Most plans allow anyone, including friends and relatives to contribute. A 529 contribution is a great way to give the gift of education to a friend or relative who is planning on attending college.
Financial Aid Information Site: One-stop shop for anything about college financial aid. Learn how you can quickly and easily get more Financial Aid without having to apply for thousands of scholarships!
Send Your Child To College Free: Or Close to it! — A money back guarantee. This is a guide for people who have a low to moderate income to a practically free college education, even if you have excessive credit card debt.