Given the current economy and increasing inflation, it is a good time to discuss college costs. As you know, College costs keep increasing and the options to help your loved ones get through it are limited. Luckily, the 529 was developed to try and combat this problem.
529 plans offer tax deferral planning along with several features and benefits. Here are 10 Quick Bullet Points:
- Anyone is eligible to take advantage. You do not need to be a parent or a relative to open one
- The account remains in your control, so you decide how and when funds will be used and you can decide who gets these funds. (Be Careful when skipping generations of tax consequences)
- Depending on your income level and where you live, you may qualify for a state income tax deduction of $10,000* (per taxpayer, per year).
- Ongoing investment management is handled by a program manager from the state treasurer’s office
- Earnings in the account grow free of federal income taxes and withdrawals are tax-free if they are used for qualified higher education expenses.
- After the TJCA was passed, You can now use up to $10,000 per year to be used for tuition for eligible K-12 schools
- High Contribution Limits unlike other savings plans such as an IRA or Coverdell Account, these limits vary by state ranging from $235,000 to $529,000
- Under the SECURE Act, Student Loans of up to $10,000 was added as a qualified education expense
- For 2024, You can contribute $18,000 per individual ( up from $15,000 in 2018-2021, $17,000 in 2023)
- For 2024 that means $90,000 ($180,000 per married couple) in one year can be contributed without incurring federal gift tax (Known as Superfunding), very unique tool for estate planning
Bonus! For 2024, you will now have the ability to convert a 529 to a Roth IRA with a lifetime limit of $35,000! Rules do apply including the 529 plan must have been opened for at least 15 years!
IMPORTANT FAFSA CHANGES for NON-PARENTAL 529
Nonparental 529s have always enjoyed the benefits seen above. However, these plans previously impacted student income and potentially a child’s eligibility for financial aid. FAFSA ( Free Application for Federal Student Aid) has presented some problems with non-parental distributions, such as untaxed student income, which could reduce a student’s aid eligibility to 40-50% This made individuals have to get clever and usually you only tapped into the account the last two years of college to not have the funds count against financial aid.
Under the new rules, this will no longer be the case.. Since FAFSA has a look back of two years, 529 withdrawals from a student in 2022 from a non-parent plan may not impact financial aid eligibility for the 2024-2025 school year. This will be a huge advantage for students as they can avoid some of the financial aid concerns down the road.
Main Takeaway: The 529 Plan can potentially be a smart investment that can set up a loved one for future success. If you have anyone you may be looking to implement this or have further questions. Please reach out to Zachary Eisner or another member of Opes Private Wealth and we can create a tax-efficient plan to help achieve your goals.
Sources: https://www.nerdwallet.com/article/investing/529-plan-rulesh https://www.columbiathreadneedleus.com/blog/fafsa-update-why-grandparents-now-have-greater-incentive-to-own-529-accounts https://thecollegeinvestor.com/21959/529-plan-private-school/
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