Lately, I have frequently been asked about 529 plans, or higher education savings plans. So, I will give the basics and advise you to check with a financial planner before investing to determine whether is a good fit for your goals.
The 529 refers to the Internal Revenue Code section 529, which is regulation allowing the higher education plans. The 529 plans are tax-advantaged investment vehicles designed to encourage saving for the future higher education expenses of a designated beneficiary. Like everything associated with the IRS, there are rules and exceptions, so I will give the basics.
Anyone can establish a 529 plan, and it is up to you to decide who the beneficiary will be. It can be for your relatives, friends, or even yourself. Any number of accounts can be started for different recipients; there is no limit. Much like an Individual Retirement Account, there is a yearly maximum for contributions. This year (2017) the maximum is $14,000. The maximum is per donor and per beneficiary. Which means that if each grandparent wants, they could individually contribute $14,000 to each child, thus a husband and wife could contribute a total of $28,000 for each grandchild.
Like many investment plans, these accounts are held by a “custodian” or investment company. Usually, these plans have multiple investments within the account. The rules allow alterations in the investments twice a year.
As long as the plans are used for higher education, the withdrawals are all tax-free (interest dividends and capital gains). What are qualified higher education expenses? The planning money can be used for tuition, room, and board (if the student chooses to live off-campus, the allowance cannot exceed the federal financial aid allowance), fees, textbooks, and computers. Any non-qualified withdrawals are subject to a 10 percent penalty and income taxes, and penalties will be assessed against the earnings portions of these withdrawals. The initial contribution (principal) is still tax-free.
If the beneficiary the account is established for decides not to pursue higher education or dies before using the plan, the plan withdrawals will face penalties and taxes. The plan can, however, be transferred into the name of another beneficiary. In many cases an investment account in the name of the beneficiary may be a better choice. Work in close collaboration with a registered financial planner to determine if the 529 higher education plan is appropriate for your goals.
Be sure to make your calendars for our next Estate Planning Workshop, October 17, at 6 p.m. Call 556-2462 to reserve your seat. This month, Estrada Law is also sponsoring The Six Retirement Account Options Every Retiree Must Know at 1340 Picacho Hills Drive at 6 p.m. on October 24. Call 556-2463 to reserve a seat.