Written by: Lauren Ferraro, CFP ®, CPC, CPFA, AIF®, Senior Wealth Manager
A common concern for parents and grandparents is saving for education expenses given that the cost of college continues to rise each year. One way to save for these expenses is through a 529 plan. A 529 plan is a tax advantaged savings vehicle designed to help fund the cost of education. 529 plans can be used to pay for education expenses, K-12, college, and graduate expenses (keep reading to find examples of qualified expenses). The SECURE Act 2.0 permitted 529 funds to be used for student loan repayments and Roth IRA contributions (up to $35,000 can be transferred to a Roth IRA if the account has been open for 15 years).
Anyone can establish a 529 account, but parents and grandparents typically open the account for their children or grandchildren. 529 plans are sponsored by a state (MOST for Missouri and Bright Start for Illinois) or financial institutions such as Charles Schwab or Fidelity. With 529 plans, the account holder contributes money and invests in preset investment options, such as mutual funds, ETFs, and target date funds which adjust their asset allocation over the years.
The money in the 529 account grows tax deferred and withdrawals for qualified education expenses are not subject to state or federal taxes. Qualified expenses include tuition, fees, and room and board. For K-12 expenses, the withdrawals are limited to $10,000 per year. If money is withdrawn for other non-qualified purposes, the withdrawals are subject to taxes plus a 10% penalty, with certain exceptions including death or disability.
The account owner may transfer funds to another family member such as their son, daughter, stepchild, sibling, or first cousin.
Some states offer additional tax benefits such as deductions. For Missouri residents, the state tax deduction is up to $8,000 per individual or $16,000 for married filing jointly couples and $10,000 or $20,000 respectfully for Illinois residents.
The annual gift tax exclusion for 2024 is $18,000. For 529 plans, this means that you can contribute up to this amount per year, per child, without counting towards your lifetime gift tax exemption.
The tax benefits offered by 529 plans make these plans attractive for parents and grandparents or other guardians who desire to save for college education.
As always, please contact your Wheelhouse team if you have any questions.
Lauren Ferraro, CFP ®, CPC, CPFA, AIF®
Senior Wealth Manager
Sources:
https://www.missourimost.org/home.html
https://brightstart.com
Ready to Take The Next Step?
For more information about any of the products and services listed here, schedule a meeting today or register to attend a seminar.