529 Plans: What you Need to Know

With the average cost of tuition rising every year, it is never too early to start saving for your children or grandchildren’s college expenses. 529 plans are among the most popular types of accounts used to set aside these funds, but there are pros and cons to using this method.

What Is a 529 Plan? A 529 plan, legally known as a “qualified tuition plan,” is a savings plan that provides tax advantages designed to encourage people to save for future tuition costs (authorized under Section 529 of the Internal Revenue Code). There are 2 types of 529 plans:

Prepaid tuition plans: this allows an individual to purchase units or credits for a beneficiary’s future tuition at current. While these plans are typically only available for public and in-state colleges, the funds can be applied to tuition costs at most private institutions.

Education savings plans: this enables an individual to open investment accounts to save for any qualified higher education expenses (not just tuition and mandatory fees). This means the money can be used toward expenses such as room and board, books, computers, and software. Unlike prepaid tuition plans, education savings plans can also be used for elementary or secondary school education, as well as higher education.

Pros and Cons: 529 plans offer several tax benefits, such as allowing your investment to grow tax-free, flexibility on tax-free gifts, and in some states, a reduction in your income tax based on contributions. However, if the funds are not used for their intended purpose and must be withdrawn for another use, they are subject to a 10% penalty tax. Some 529 plans require application, enrollment, and administrative fees, and it is likely that a college applicant with a 529 plan will be offered less financial aid.

Estate Planning Considerations: Name a successor! It is important to name reliable primary and secondary successors who can take control of the account if the original owner passes away. The successor should be given certain discretion to make withdraws, maintain the account, and make distributions. Weigh the alternatives to a 529 plan. Through trusts, such as a Demand Trust or a Revocable Education Trust, an individual can protect investments and receive gift tax exemptions while providing more flexibility for the Trustee.

We can help! If saving for your child or grandchild’s college education is one of your estate planning goals, we can discuss which method will work best for you and your family. Contact us today to get started!