Saving for college? The 411 on 529s
Saving for college is something that can never be started too early. Like with any savings plan, 529s represent a long-term commitment and come with things to consider, such as penalties and restrictions. So, before opening a 529 plan, here are a few things to keep in mind…
Potential gift tax penalty
Individuals are eligible to contribute $75,000 gift-tax free to a 529 plan when electing a fiveyear contribution, while couples can contribute $150,000 tax-free over five years. Be advised that a gift-tax penalty may be imposed on contributions under two conditions: 1) If you make any additional contributions greater than the maximum gift-tax limits within five years and 2) if the contributor passes away before the five-year period has expired. For those who elect to contribute per single year, the gift tax limits are $15,000 for an individual and $30,000 for couples.
All 529 savings plans have associated fees- such as maintenance and enrollment. Be aware that some plan fees are higher than others. For example, plans purchased through a financial agency generally come with a higher upfront cost than plans bought directly through a state provider. Consider fees before making a decision.
Restrictions and penalties
If you use 529 funds for any non-qualified expense, you will be subject to income taxes and a 10 percent federal penalty. As such, be sure to use funds only for qualified expenses. such as tuition, books and boarding. If you aren’t sure if an expense is qualified, be sure to speak to your financial advisor.
Available time to save
Consider how much time you have to save for college. This will affect your investment strategy and the plan you choose. Be sure to carefully analyze outcomes and investment options for your unique situation to ensure you save enough by the time you need the funds.
Understand the risk
While investing in a 529 plan is a sound tactic, it’s always possible that circumstances will arise that cause you to miss your target savings goal. To avoid this scenario, be sure to carefully monitor the progress of your 529 plan and make any necessary adjustments along the way.
Be aware of state income tax return benefits
Most states that have an income tax offer a tax benefit for contributing to state provider 529 plans. Additionally, some states offer a benefit regardless of who the 529 plan is through, including Arizona, Alaska, Kansas. Minnesota. Missouri, Montana and Pennsylvania. States that do not offer a tax return benefit include California, Hawaii, Kentucky, New Jersey, Delaware and Maine.
Be sure to think it through before you open a 529 plan. Of course. don’t think too long… your kids will be grown and ready to head off to college before you know it!