Now that another school year is drawing to a close, your young children are a step closer to the day when they’ll be heading off to college. Of course, as you’re probably aware, higher education doesn’t come cheap — and the costs seem to continuously climb. You can help your children — or even your grandchildren — meet these expenses by investing in a 529 plan. And this college savings vehicle offers estate-planning benefits.
As a college funding vehicle, a 529 plan offers some significant benefits. When you contribute to a 529 plan, your earnings accumulate tax free, provided they are used for qualified higher education expenses. (Keep in mind, though, that 529 plan distributions not used for qualified expenses may be subject to federal and state income tax and a 10% IRS penalty.) Furthermore, your 529 plan contributions may be deductible from your state taxes. However, 529 plans vary, so be sure to check with your tax advisor. And the lifetime contribution limits for 529 plans are quite generous; while these limits vary by state, many plans allow contributions well in excess of $200,000. Plus, a 529 plan is flexible: If the child, grandchild or other beneficiary decides against college, you can transfer the unused funds to someone else, tax and penalty free.
Now, let’s turn to a 529 plan’s estate-planning benefits. If you think that you may need to reduce the size of your taxable estate, and you also want to create a legacy you may be able to enjoy during your lifetime, you may find that the 529 plan offers a solution for you. When you establish and contribute to a 529 plan, the assets leave your estate — but they don’t leave your control. If your named beneficiary decides against college and you don’t have another family member to whom you can transfer the account — or if you simply change your mind about funding the 529 plan — you can get your money back at any time, although, as mentioned above, you’ll have to pay taxes, and possibly a 10% IRS penalty, on the earnings.
Your contributions to a 529 plan also qualify for the $14,000 annual gift tax exclusion, so you can give large amounts each year without incurring the gift tax.
In the investment world, you can find many vehicles that can help you make progress toward one goal. But it’s far less common to find something that may give you a boost toward two. And when the two goals are helping a child or grandchild go to college and lowering the value of your taxable estate — while still maintaining control of your assets — you’ve got an investment worth considering. So consult with your tax and financial advisors to determine if a 529 plan is right for you. And if it is, think about taking action soon, because the more years you can contribute to a 529 plan, the better the outlook for both your future student and your estate plans.
Edward Jones, its employees and financial advisors are not estate planners and cannot provide tax or legal advice. You should consult your estate-planning attorney or qualified tax advisor regarding your situation.