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Back to School –Why You Should Use a 529 Plan and 529 Plan Updates

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A 529 plan is a college savings plan offering tax and financial aid benefits for qualified educational expenses (https://www.irs.gov/credits-deductions/individuals/qualified-ed-expenses). Each parent and other relatives can contribute up to $15,000 per child, per year to a 529 account without reporting the contribution to the IRS.  A 529 account can also be “superfunded” with contributions of $75,000 per person or $150,000 per couple—which uses up your federal gift-tax exclusion for 5 years. One thing to consider is that the $15,000 per person gift limit includes all gifts made to that individual (cash, stock, etc.).

Advantages of a 529 Plan

Growth from the investments is not taxed at the federal level if the funds are only used for qualified expenses. Distributions will be reported to the IRS, so it is important to keep accurate records of expenses.

Money can be invested at your desired risk level. Generally, the longer the child has until the money is needed, the more aggressive the account can be. As the child approaches college, the investments can be adjusted and include more conservative options to reduce the risk of volatility.

Additionally, most states offer a deduction or credit on your state income taxes, subject to limits set by each state.  Currently, 34 states and the District of Columbia give account owners a full or partial state income tax deduction or credit for contributions to their state’s 529 plan. (www.finaid.org/savings/state529plans.phtml). In Missouri, for example, up to $8,000 (single) or $16,000 (married filing jointly) in contributions can be deducted from taxable income.

Over the long haul, a 529 plan is a great option for parents and grandparents to save because of the combination of tax advantages and the power of compounding interest.

Recent changes to 529 Plans

The Tax Cuts and Jobs Act (TCJA) expanded the benefits of a 529 Plan. Previously, distributions could only be used for higher education expenses. The TCJA now includes K-12 qualified expenses. These schools can be public, private or religious. Taxpayers can withdraw up to $10,000 per year & per child, tax-free to pay for qualified elementary and secondary expenses, such as tuition and books.

Save now and worry less later when thinking about helping a child with educational expenses! As always, our team is here to help you make an appropriate decision about saving for your child’s future.

What if we don’t use it?

If you don’t have education costs and just want to pull the cash back out:

  • You will pay federal income tax on earnings
  • You will pay a 10% penalty on the earnings

Other options:

  • You can change the beneficiary if only one child doesn’t use the 529
  • If the child gets a scholarship, you can pull the scholarship amount out tax free

HighTower St. Louis is registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.