College tuition costs continue to rise, forcing families to plan far in advance for how they will afford the future costs of their children’s higher education. Taking advantage of a 529 saving plan helps families reach these goals while providing significant tax benefits.
Contributions you make today to a 529 college-saving plan grow tax-deferred until children reach college age. At that point, plan withdraws are tax-free when used to pay for a child’s qualifying education expenses, including tuition, books, computers and room and board. Families also have the option to save money in 529 plans to fund their children’s K through 12th-grade education at non-college level religious or private schools. However, plan withdrawals for primary and secondary school tuition are limited to $10,000 each year.
Parents, grandparents and others who fund 529 savings plans for a minor child can do so in a manner that works best for them, whether it be small monthly installments or larger annual gifts free of federal taxes on investment gains. Additionally, donors may avoid federal gift tax on 529 plan contributions when they contribute $18,000 or less in 2024 to as many beneficiaries as they choose (or up to $36,000 per beneficiary for married couples filing joint tax returns.) This federal gift-tax exemption is adjusted annually for inflation, meaning the amount changes from one year to the next.
The law also allows donors with the financial means to superfund 529 college and private school savings plans for as many children as they wish by contributing five years of tax-free dollars in one single year. For example, a single taxpayer may contribute to a 529 plan a lump sum of up to $90,000 per beneficiary in 2024; married couples who file joint tax returns may set aside $180,000 free of gift taxes and allow those dollars to grow free of capital gains taxes in a 529 plan for each of their children and grandchildren. Any gifts above these amounts will count against a taxpayer’s lifetime gift-tax exclusion, which for 2023 is $13.610 million for individual taxpayers or $27.220 million for married taxpayers filing jointly.
Based on these rules, beneficiaries of 529 savings plans may withdraw up to a maximum of $10,000 when they turn kindergarten age to pay for private school tuition. They may continue taking $10,000 withdrawals for the next 13 years until they complete high school. At that point, they may withdraw an unrestricted amount of funds each year to pay for qualifying college-level education expenses. Beginning in 2024, beneficiaries with remaining balances in their 529 plans can roll over as much as $35,000 into personal Roth IRAs free of penalties and taxes, provided they meet certain restrictions.
About the Author: Brendan T. Hayes is a financial planner with Provenance Wealth Advisors (PWA), an Independent Registered Investment advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with PWA Securities, LLC (PWAS). He can be reached in the firm’s West Palm Beach, Fla., office at (561) 361-2001 or info@provwealth.com.
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This material is being provided for information purposes only and is not a complete description or a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the preceding material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult your financial advisor about your individual situation.
This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. This and other information about 529 plans is available in the issuer’s official statement and should be read carefully before investing. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors.
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Updated April 10, 2024