Financial Planning Matters: 529 College Savings Plans Can Benefit Multiple Generations
Steve Kohler, CFP®, CPFA and Nancy Kunz, CFP®, ChFC®, CLU®
The cost of higher education was catapulted to center stage during the most recent election. Much of the discussion centered on its high cost and whether it is time for government to provide relief to families struggling to pay for it.
A college education is now the second-largest expense an individual is likely to make in a lifetime — right after purchasing a home. Today, the average college graduate leaves school $30,000 in the red, up from $10,000 in the 1990s.
Some in Washington have proposed free tuition for certain 2 and 4-year public institutions. But even with such a program, it would just cover tuition and fees. In reality, parents and students should not rely on promises of free tuition. They should instead continue saving in plans such as the 529 plan. Participation in 529 plans is growing with accounts reaching 14.6 million in 2020. The average account size also hit an all-time high of $25,664.
Contributions to a 529 plan are after-tax dollars and grow tax-free. This means that distributions are not taxed when the student withdraws the funds for qualified expenses. Qualified expenses include tuition at eligible public or private two-year or four-year institutions; books, supplies and equipment such as computers and Internet access along with reasonable costs for room and board. Money left over in a 529 plan can also be used for graduate school, transferred to a sibling or even saved for a grandchild.
Although most people consider 529 college savings plans to be for only education, these accounts also offer a flexible way to transfer wealth. The Estate Tax exemption under President Trump will likely be changing under the new Biden administration and may expose more families to higher estate taxes.
While there isn’t a federal deduction for contributions, 529 plans offer some great tax advantages in addition to investing and growing money tax-free for approved education expenses for your children. Some states also allow a certain amount of state income tax deductions for contributions. With the threat of higher taxes looming, some families may be eager to shift wealth to younger generations. Grandparents may use a 529 plan for their grandchildren and perhaps even beyond.
In this scenario, 529 plans offer an important exception regarding gift taxes. Typically, on transfers of more than $15,000 per recipient per year, if you gift more than your lifetime limit, you will owe gift taxes on the transfer.
With a 529 plan, donors may front-load $15,000 contributions for five years by adding $75,000 at once, and may double their transfer to $150,000 if their spouse agrees to make the same gift. Donors may use this strategy for multiple recipients, without the risk of gift taxes.
It allows grandparents to start making gifts to younger generations and transferring their wealth in a way that benefits everyone.
And unlike some other estate-planning tools, donors may take the money back if needed.
These perks may allow families to reduce their estate while paying for education for generations to come.
529 plans continue to be the best option to save for college while providing tax benefits you may not even be aware of. If you have not done so, it is worth talking to your advisor about their advantages as part of your overall financial planning strategy.
Steven Kohler, CFP®, CPFA
Senior Financial Advisor
Financial Planning Chair
Nancy Kunz, CFP®, ChFC®, CLU®
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