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Get to Know 529s

Posted at May 23, 2016 | By : | Categories : Articles of Interest | Comments Off on Get to Know 529s


Start saving for your child’s or grandchild’s education with a 529 plan.

College tuition is a big bill to plan for, and even the best savings strategy may leave you struggling to keep pace with the rising cost of higher education. A 529 plan, however, is a different kind of savings plan — one that can not only grow with your child, but helps reduce your tax liability and benefit your overall estate as well. Here’s a 529 primer:

  • 529s are tax-advantaged, diversified investments that have the potential to grow faster than traditional savings.
    Over the last decade, college tuition increased by an average of 5% annually. That’s substantially higher than the general inflation rate, the average increase in personal income, and the average interest on a traditional savings account.
  • Funds can cover tuition, books, room and board, and now computers.
    Withdrawals are tax-free if used for qualified expenses at eligible schools.
  • They can be opened with as little as $25.
    There are no income limits on establishing or contributing to a 529. Anyone can invest.
  • Your estate can benefit through a unique 529 plan gift provision.
    With “accelerated gifting,” you can contribute up to five years’ worth of gifts ($150,000 for a married couple) at one time per child beneficiary and significantly lower your estate’s tax liability.
  • Assets in a 529 remain in control of the person who owns the account, not the beneficiary.
    You can change beneficiaries at any time, and all unused assets can be withdrawn, though earnings may be subject to taxes and a 10% penalty.
  • Owning a 529 may not limit financial aid opportunities as much as you think.
    Since the assets belong to the account owner and not the beneficiary, they are assessed at a smaller rate when deter­mining aid.

Talk to your financial advisor today about the benefits of a 529 plan, and which 529 plan may be best for you.

Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible college expenses, such as tuition and room and board. However, if you withdraw money from a 529 plan and do not use it on an eligible college expense, you generally will be subject to income tax and an additional 10% federal tax penalty on earnings. You should consult a tax advisor regarding any state tax consequences before investing in a 529 plan. Diversification does not guarantee a profit nor protect against loss. Investments are subject to risk including the possible loss of capital. Certain conditions may apply.
Rules and laws governing 529 plans are varied and subject to change. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents.  Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state. Tax laws and provisions may change at any time. Death of the contributor prior to the end of the five-year period may result in a portion of the contribution to be included in the contributor’s estate. Please consult a qualified tax professional to discuss tax matters.



Michael Schafer

About Michael Schafer

Michael (Mike) Schafer is President of Creative Wealth Associates and is a investment advisor representative and financial planner with Raymond James Financial Services, Inc., member FINRA/SIPC. Although that may sound like a mouth-full, Mike is known for his ability to explain in simple terms what others sometimes spew in industry-speak and intimidating undertones.

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