529 Plan Facts

January 19th, 2020 at 8:06 AM

  1. 529 Plans — Income Tax Breaks–although contributions are NOT deductible, earnings in the 529 plan grow federal tax-free and are not taxed when the funds are distributed for college education. In addition, as of January 1, 2018, tax-free withdrawals may include up to $10,000 in tuition expenses for private, public, or religious elementary and secondary schools per year, per beneficiary. In 2019 the student loan payment and costs of apprenticeship programs were added as tax-free withdrawals.
  2. Your Own State May Offer Tax Breaks as Well-over 30 states offer a full or partial tax deduction or credit for 529 Plan contributions.
  3. You, the Donor, Stay in Control of the Account-with few exceptions, the named beneficiary has no legal rights to the funds in the 529 Plan. This differs from UGMA/UTMA where the child takes control of the funds once they have reached legal age. You can withdraw the funds from the Plan at any time for any reason-however, the earnings portion of the non-qualified withdrawals will incur income tax and an additional 10% penalty.
  4. Low Maintenance-just do a google search for best 529 plans, or contact your financial advisor. Most Plans allow you to set it and forget it with automatic withdrawals that link to your bank account or payroll deduction plan. The ongoing investment management of the account is handled by an outside investment company hired as the program manager or set by the state treasurer’s office.
  5. Simplified Tax Reporting-contributions are not included in your federal tax filings, no 1099’s, and for 2018/2019 there is a $15000 per individual, per donor that qualifies for gift tax exclusion.
  6. Flexibility-you can change the Plan 2x per calendar year, rollover to another Plan once a year in a 12 month period.
  7. Everyone is Eligible-no income limits as with Roth Ira’s or Coverdale plans, age limits, a potential substantial lifetime contributions limits that vary per State from 235K to $520K—far more than what is required for most.

Mark S. Fineberg, CPA

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