Understanding 529 College Savings Plans
Escalating college tuition costs have lead to a surge in associated debt as students and their families resort to borrowing more and more to cover rising college expenses. Every dollar you save today means less that you will need to borrow later and can help reduce the debt load that many college graduates face upon graduation. 529 College Savings Plans can play a valuable role in accumulating savings for future college expenses.
A 529 college savings plan allows the donor to make contributions to the plan that will enjoy tax-free earnings growth. Withdrawals from the account are tax-free to the extent that they are used to pay for qualified college expenses including tuition, fees, books, supplies, as well as room and board. If withdrawals are not used to pay for college education expenses, the income portion is included in the gross income of the beneficiary and is subject to a 10% penalty. You as the owner of the 529 plan maintain control of the account assets, not the beneficiary. If the child does not attend college, the beneficiary can be changed to certain members of the beneficiary’s family.
When calculating student financial aid needs, parental assets are assigned a lower weighting than student assets are. Since the owner of a 529 plan is not normally the beneficiary, the 529 plan assets may receive beneficial treatment in determining the student’s financial need. This is an advantage over the funds held in an account in the student’s name such as custodial accounts.
An individual can gift up to $14,000 per year to a 529 plan without triggering a gift tax, and there is no limit on the donor’s adjusted gross income in determining their eligibility to contribute.
Some states allow for state tax deductions for contributions while other states do not. Pennsylvania permits residents to take a PA state tax deduction for contributions they make to any 529 plan. The current limit is $14,000 per beneficiary for an individual or a $28,000 limit per beneficiary for married taxpayers provided that each taxpayer has taxable income of at least the amount deducted. Neither Delaware nor New Jersey permits their residents to take a deduction for contributions to 529 plans.
Once an account is set up, contributions can come from anyone. Grandparents, aunts, uncles, and friends can all make contributions to the existing 529 account, or they can open a separate 529 plan with themselves as the account owner.
Educating our clients about college savings is a component of the comprehensive financial relationship that we have with our clients. The team at Wealthcare Solutions, LLC is proud to be a valuable resource assisting families in reaching their college savings objectives.