A 529 plan is an account in which you can save for educational expenses. There are two types of plans. The first is a pre-paid tuition plan which is typically sponsored by a university. The second type of plan is an investment savings plan, typically sponsored by a state or state agency. The second type of plan is the more common one.
Income Tax Benefits: 529 accounts are specialized accounts with a great tax benefit. Income earned in the account is not taxed currently. If the money is used for qualified education expenses, such as tuition, books, fees, and even room and board, the money may be distributed from the plan tax-free. In other words, the earnings would never have been taxed.
There is no federal income tax deduction upon making the contribution to the plan, but some states offer state income tax deductions. The big income tax benefit comes on the back end when distributions are made tax-free (if for qualified educational expenses).
Estate Planning Benefits: A 529 plan also has special benefits from an estate planning perspective. Contributions to the plan can qualify for the annual gift tax exclusion, which is currently up to $15,000 per year per donee. Additionally, the donor can give up to five years of exclusions at one time. If they survive into the fifth year, those contributions will not use any of the donor’s combined estate and gift tax exclusion and will have been made completely gift tax-free.
529 plans are also a unique way to remove assets from the donor’s taxable estate, yet the donor can still retain complete control of the assets. Normally, retention of control would cause estate tax inclusion under Section 2038 of the Internal Revenue Code. But, due to the unique nature of 529 plans and their statutory underpinnings, the donor can be the account owner and could even take the money back if desired, yet the account is not in the donor’s taxable estate.
New in 2018: Originally, 529 plans were designed for post-secondary, i.e., college and graduate school, expenses. However, beginning in 2018, up to $10,000 of distributions annually for K-12 expenses can be “qualified education expenses” and, thus, income tax-free. Thus, if you have a child in a private elementary or high school, you’ll want to look into this new benefit. You don’t have to wait until they’re in college anymore!
529 plans are extremely useful tools for saving for educational expenses. If you’d like to learn more about this, you can go to this link.
In the next blog, we’ll examine related accounts, 529A or “ABLE” accounts.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128