Who Can Own A 529 College Savings Plan
529 plans are available to all U.S. citizens and resident aliens of legal age. Families of all income levels can potentially benefit from 529 plans. Not only do these plans have the potential to grow tax-deferred, but you also might not have to pay federal or state taxes on that money when you pay for qualified education expenses.
If you’re the account owner, you must designate a beneficiary who will receive the money in the account. You can change the beneficiary at any time. You can make a lump sum contribution to a 529 plan or pay into it over time.
The account owner is not the only one who can contribute to a 529 plan, though. 529 plans generally accept contributions from third parties by check or electronic deposit. It’s important to note that 529 plans are investments and come with market risk, including the potential to lose some or all of the principal amount invested.
Superfunding A 529 Plan Account
If you have considerable means and are worried about a reduction in your lifetime gift and estate tax exemption, you can take advantage of âsuperfundingâ a 529 plan account. There is a special rule in the Internal Revenue Code specifically for 529 plan contributions . It allows a gift giver to make a lump sum contribution up to five times the annual gift tax exclusion and spread it over five years. This means that for 2021, you can contribute up to $75,000 to a 529 account. The amount will not reduce your lifetime gift and estate tax exemption.
Any future increase to the annual gift tax exclusion will proportionally increase your allowable one-time contribution under this rule. For example, the annual exclusion increased from $14,000 in 2017 to $15,000 for 2018 through 2021. It is likely that the annual exclusion will be increased in future years to account for inflation. If the annual exclusion increases to $16,000, then the five-year averaging amount will increase to $80,000.
If you elect the five-year averaging rule, you will need to file Form 709. There is a box that you must check on the form to treat transfers made to a qualified tuition program as being made ratably over a five-year period.
C Control The Money And Choose Among Many Investment Options
Unlike a custodial account that eventually transfers ownership to the child, with a 529 savings plan, the account owner calls the shots on how and when to spend the money. Not only does this oversight keep the child from spending the money on something other than college, it allows the account owner to transfer the money to another beneficiary for any reason. For example, say the original child for whom the account was set up chooses not to go to collegeor doesn’t use all the money in the accountthe account owner can then transfer the unused money to another named beneficiary.
Each 529 savings plan offers its own range of investment options, which might include age-based strategies conservative, moderate, and aggressive portfolios or even a mix of funds from which you can build your own portfolio. Typically, plans allow you to change your investment options twice each calendar year or if you change beneficiaries.
“Whatever age-based portfolio you choose, the first step in the process is defining the investment objective,” says Heather Zakian, institutional portfolio manager for the Fidelity-managed 529 plans. “With appropriate, age-based investments, the objective is to grow the assets while maintaining an age-appropriate balance between risk and return.”
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Are All Distributions From 529 Savings Plans Tax
The distributions from 529 savings plans are free if they are used to pay for qualified college expenses. However, any withdrawals for non-qualified distributions will be subject to federal taxes, 10% federal tax penalty on the earnings as well as state taxes. One of the ways to avoid this situation is to name a new beneficiary like another child or grandchild.
Are There Any Limits To 529 Plan Contributions
Yes. There are limits on how much you can contribute to a 529 plan. These limits are established by the Internal Revenue Code in order to prevent any beneficiary of a 529 account from exceeding the amount needed to fund their qualifying expenses. Currently, the maximum amount allowed for a single beneficiary of an NC 529 program is $450,000. This number refers to the beneficiary, rather than each individual 529 plan.
This number is based on seven total years of postsecondary education at the most expensive schools in North Carolina. Its also important to point out that the NC 529 plan can also be used at out-of-state schools.
For a contributor, there are limits related to the federal gift tax. Individuals may contribute up to $15,000 annually to avoid the federal gift tax. This amount is doubled for married couples electing to split gifts.
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Is California 529 Plan Tax Deductible
No tax deduction. While California’s 529 plan is good, California is one of seven states with an income tax system that does not allow tax deductions on contributions. However, there is no contribution limit and you can contribute up to $350,000 to the plan for a specific recipient. Parents, grandparents or other relatives can also contribute.
What If The Beneficiary Of A 529 Account Dies
If the designated beneficiary of your 529 account dies, look to the rules of your plan for control issues. Generally, the account owner retains control of the account. The account owner may be able to name a new beneficiary or else make a withdrawal from the account. The earnings portion of the withdrawal would be taxable, but you won’t be charged a penalty for terminating an account upon the death of the beneficiary.
Keep in mind that if the beneficiary dies with a 529 balance, the balance may be included in the beneficiary’s taxable estate.
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How A 529 Plan Works
A 529 plan allows investors to save and grow money on behalf of a beneficiary, such as a child, grandchild, niece, nephew, or even for themselves. The money grows tax-free and can be withdrawn tax-free, provided it is used for qualified education expenses. These include tuition and fees certain electronics, such as a computer books and classroom equipment and some room and board costs.
Plan distributions that are used to pay for items that are not qualified educational expenses are taxed and subject to a 10% fee, with exceptions made for circumstances such as death and disability.
There are two main types of 529 plans: prepaid tuition plans, in which the plan holder pays in advance for the beneficiarys tuition and fees at a specific school, and savings plans, which are tax-advantaged investment vehicles similar to individual retirement accounts .
Can The Upromise Rewards Program Be Linked To A 529 Plan
Yes, Upromise Rewards can be tied to any 529 educational savings plan. Upromise Rewards membership is free and provides college benefits to members. Beneficiary, eligible educational institution for the benefit of the Beneficiary , Beneficiary, Ownership of the Beneficiary or Account Holder on behalf of the Account Holder.
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My Plan For My Own Family
For my three teenagers, my strategy is to over-fund their 529 college savings plans. The money they do not use for college will continue to grow tax-deferred and can be used for their own children by simply changing the beneficiary. I retain ownership of the account. That means they won’t spend the money I’m giving them on something other than my grandkids college.
If, for any reason, I need to tap into those accounts, the earnings portion is subject to federal and state income taxes and a 10% federal penalty. I do not expect to ever need the money in those accounts, but I could see that as a drawback for some retirees who are not quite sure they can afford to do this. Knowing you can withdraw money from the account should ease that concern.
Money invested in 529 college savings plans grows free of state and federal taxes, and if/when the money is ultimately withdrawn and used for qualified higher-education expenses, it comes out income tax-free. There are no maximum annual contribution limits, but keep in mind there can gift tax consequences if you give more than $14,000 per year . There is a way to contribute up to $70,000 in a single year without gift taxes, provided you make no other gifts to the beneficiary that year or for the next four years. Money can be added to the account until the balance hits the limit, which varies by state, from $235,000 for Georgia and Mississippi up to over $500,000 in Pennsylvania.
What Is The Right Solution For You
Another approach for parents and grandparents may be to combine the features of custodial accounts and 529 college savings plans with a custodial 529 plan account. When the student takes ownership of the account, they must use the money for college expenses or pay a penalty. A custodial 529 account still counts as a parental asset even when the student takes ownershipin contrast to the UGMA/UTMA account which is always considered an asset owned by the child.
The contribution limits for a custodial 529 account align with the limits for a UGMA/UTMA account. For federal tax purposes, the annual contribution limit is the federal annual gifting limit currently in effect for the year in which a contribution is made to an account$15,000 in 2020.
Also, you cannot make an accelerated gift to a custodial 529 account.
Alternatively, grandparents can pay for college directly. For estate planning purposes, the advantage of paying directly is that the payment is not considered a gift. So, a grandparent could still use their annual gift exclusion to give up to $15,000 to the same grandchild. The downside is that a direct tuition payment could potentially reduce subsequent financial aid. Another potential downside is losing years of tax-advantaged savings offered with a 529 plan or a Coverdell ESAbut every situation is different.
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What Is A 529 Savings Plan
According to a research report from CollegeBoard.org, for the 2020 to 2021 school year, the cost of attending a public college for an in-state student was approximately $10,560, including tuition and fees. For out-of-state students, the cost nearly tripled: $27,020. A year at a private college averaged even more: $37,650. Families need to save as much as possible as early as possible to get ahead of rising education costs.
Named after the section of the Internal Revenue Service code that established them, 529 savings plans, are one of the nations best ways to save for higher education expenses. These qualified tuition plans allow federal tax-free withdrawal of earnings and the potential for tax deductions, which can help families afford the rapidly increasing cost of college.
A primary benefit of 529 plans is the high contribution limit. Each state operates its own 529 plan and makes its own rules for the plan, so maximum contribution levels vary across states. Typically, 529 limits are high enough that most will never have to worry about hitting the ceiling, but those considering attending a private university could need to save a significant amount of money.
Building Your Collegebacker Team
If getting help choosing a 529 isnt cool enough, their specialty lies in the ease of getting others to jump in and help the parents save. When you set up your account CollegeBacker allows you to build your team. This means you can invite others to contribute to your childs college fund.
CollegeBacker provides an easily shareable link you can send to anyone who might want to help contribute to your childs college account. The link will take the family member right to your childs contribution page, and it also shows them how that gift will grow over time. So instead of receiving gifts that will be quickly outgrown, your child can receive college funds. This is perfect for grandparents, aunts, uncles, and close friends who want to do more than just give your child another piece of molded plastic.
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College Savings Plan Rules
The rules are simple. You can contribute after-tax dollars to the plan of your choice and withdraw the contributions and investment earnings from the plan at any time for qualifying higher education expenses used by the beneficiary of the plan .
Contributions are therefore limited to the amount necessary to pay for the beneficiarys qualifying expenses. However, as youll see below the funds can be transferred to other beneficiaries.
Note gift tax rules can affect your contributions and some states do limit the amount of annual contribution to their plan. Have more nuanced questions on the rules? Visit the IRS Q& A page on this subject.
What Can I Use My 529 Plan To Pay For
Use your 529 savings at trade schools or business schools, community colleges, and certificate programs to pay for related expenses, including tuition, housing, meal plans, books, supplies, and more, technology, and computer equipment. Use the federal school code search on the FAFSA website for a complete list of eligible schools.
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What If The Owner Of A 529 Account Dies
If the owner of a 529 account dies, the value of the 529 account will not usually be included in his or her estate. Instead, the value of the account will be included in the estate of the designated beneficiary of the 529 account.
There is an exception, though, if you made the five-year election and died before the five-year period ended. In this case, the portion of the contribution allocated to the years after your death would be included in your federal gross estate. For example, assume you made a $50,000 contribution to a 529 savings plan in Year 1 and elected to treat the gift as if made evenly over five years. You die in Year 2. Your Year 1 and Year 2 contributions of $10,000 each are not part of your federal gross estate. The remaining $30,000 would be included in your gross estate.
Some states have an estate tax like the federal estate tax other states calculate estate taxes differently. Review the rules in your state so you know how your 529 account will be taxed at your death.
When the account owner dies, the terms of the 529 plan will control who becomes the new account owner. Some states permit the account owner to name a contingent account owner, who’d assume all rights if the original account owner dies. In other states, account ownership may pass to the designated beneficiary. Alternatively, the account may be considered part of the account owner’s probate estate and may pass according to a will .
Overview Of Gift And Estate Tax Rules
If you give away money or property during your life, you may be subject to federal gift tax .
Federal gift tax generally applies if you give someone more than the annual gift tax exclusion amount, currently $15,000, during the tax year. That means you can give up to $15,000 each year, to as many individuals as you like, federal gift tax free.
In addition, you’re allowed an “applicable exclusion amount” that effectively exempts around $11,580,000 in 2020 for total lifetime gifts and bequests made at death.
Note: State tax treatment may differ from federal tax treatment, so look to the laws of your state to find out how your state will treat a 529 plan gift.
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How To Choose A State 529 College Savings Plan
Once youâve decided on a 529 plan type, you need to choose which state you want to work with. Contrary to popular belief, you can participate in most 529 plans across state borders. Some plans, particularly prepaid tuition plans, require in-state residence. Make sure to research the tax benefits your state offers for 529 contributions.
âMany states provide a state tax deduction for contributions,â said Philip H. Weiss, Certified Public Accountant and principal at Apprise Wealth Management. âThat benefit is typically only available if you contribute to the plan in your state of residence.â
State plans differ in terms of contribution minimums, maximums and investment options. Check out our state-by-state guide to college savings plans to find out the major terms, conditions and tax breaks associated with the investment and prepaid tuition plans offered by your state.
âWhen choosing plans, you should pay attention to the underlying costs and expenses associated with the plan as well as the types of funds you can invest in,â said Weiss. âIf you don’t get a state tax deduction for contributions, the most common choice is usually Utah, as the costs are low and the investment options are strong.â
In other words, look for low-fee plans with quality investment options. If you need help choosing a 529 plan, consult with a financial adviser.
Tax Deductions For Iowa Taxpayers
Iowa taxpayers who are Participants can deduct up to $3,474 for 2021 of their contributions per Beneficiary, including rollovers, in determining their adjusted gross income for Iowa income tax purposes. This deduction applies to each Beneficiary account they own and contribute to. For example, married Participants who contribute to separate accounts on behalf of their two children can deduct up to $13,896 in 2021. **
$3,474 + $3,474 + $3,474 + $3,474 = $13,896
Deduct up to $3,474 per beneficiary account.
Note: Iowa taxpayers can contribute to their College Savings Iowa 529 accounts until the Iowa state income tax-filing deadline, which is generally April 30.
Qualifying contributions are deducted on line 24, item “g” of your Iowa income tax return. Most tax software programs will ask for this information and correctly indicate the appropriate reason for the deduction.
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How Much Can You Contribute
To qualify as a 529 plan under federal rules, a state program must not accept contributions in excess of the anticipated cost of a beneficiary’s qualified education expenses. At one time, this meant five years of tuition, fees, and room and board at the costliest college under the plan, pursuant to the federal government’s “safe harbor” guideline. Now, however, states are interpreting this guideline more broadly, revising their limits to reflect the cost of attending the most expensive schools in the country and including the cost of graduate school. As a result, most states have contribution limits of $300,000 and up .
A state’s limit will apply to either kind of 529 plan: prepaid tuition plan or college savings plan. For a prepaid tuition plan, the state’s limit is a limit on the total contributions. For example, if the state’s limit is $300,000, you can’t contribute more than $300,000. On the other hand, a college savings plan limits the value of the account for a beneficiary. When the value of the account reaches the state’s limit, no more contributions will be accepted. For example, assume the state’s limit is $300,000. If you contribute $250,000 and the account has $50,000 of earnings, you won’t be able to contribute anymore–the total value of the account has reached the $300,000 limit.