529 College Savings Plans FAQs
529 College Savings Plans FAQs
November 1, 2018
When we meet with clients, questions regarding saving for college, and 529 college savings plans in particular, are frequently on the agenda. A 529 plan may be a good solution for many parents wishing to help fund a child’s future education costs. Funds invested in a 529 plan grow tax-free if used for qualified education expenses. Some states, like Illinois, also offer a state tax deduction for residents who contribute certain amounts to a 529 plan.
Beyond the tax benefits, there are a number of things to keep in mind as contributions are made in this type of account. I’ve compiled a list of frequently asked questions below:
1. How does the account work? The account will need to specify an owner and a beneficiary. Generally, the owner of the account is either the parent or a relative. The student will be named as the beneficiary.
It’s important to note that the beneficiary does not have access to the account. The owner controls the account and makes all investment and withdrawal decisions. There can only be one beneficiary and one owner per account. A successor owner is named to the account in case anything should happen to the current owner, such as becoming incapacitated or death.
2. Who can open and contribute to a 529 plan? In order to open an account, you must be a resident of the United States, at least 18 years old, hold a valid social security number, and a valid address. Anyone can contribute to an existing 529 plan, however.
3. Are there age or income restrictions to contribute to 529 plans? No. There are no age or income restrictions to contribute to 529 plans.
4. How much can I contribute to a 529 plan? In 2018, a single person can contribute $15,000 and a married couple can contribute $30,000 before gift tax considerations need to be considered. Anything over that amount and you need to report it as a gift to the IRS on form 709. A 529 plan has a special feature that allows each person to make a lump-sum contribution of up to 5 times the annual limit. In this case, an individual can contribute $75,000 and a married couple can contribute $150,000, provided you make a special election on your federal gift tax return. This spreads the lump-sum gift over five years and restricts you from making any other gifts to the child during the next five-year period. This tool is often used when there is a need to move money out of an estate and helps to supercharge the 529 account in the process.
5. What expenses are covered by a 529 plan? A 529 plan can be used for any qualified higher education expense. Examples include tuition, fees, books, supplies, and, as long as the student is enrolled at least half-time, room and board.
6. What happens if there is money left over in a 529 account? The remaining money still belongs to the owner of the account. The account owner can decide among the following three options:
1. The beneficiary can be updated to another family member (siblings, parents, nieces, nephews, aunts, uncles and first cousins). There is no tax consequence in this scenario.
2. The money can be used for other non-educational purposes. In this case, the owner of the account will pay a 10% penalty and ordinary income tax on the earnings.
3. The funds can be left in the account with the current beneficiary in case the beneficiary goes back to school at a later date or until the account owner decides who should be the next beneficiary.
7. Do I have to invest in my own state’s plan? No, but there may be tax benefits to entice you to invest in your own state’s plan. Regardless of which state plan you choose, the funds can be used at any accredited university, vocational school, or post-secondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. Therefore, you can invest in the Illinois 529 plan and attend a school outside of Illinois.
8. Do Illinois and Wisconsin offer any tax benefits to invest in their 529 plans? Yes, they do. An individual Illinois resident can deduct up to $10,000 in contributions to an Illinois 529 plan per year from their state income tax. Married couples filing taxes jointly can deduct up to $20,000 per year, regardless of the number of children they have. For example, if a couple contributed $20,000 per year to their child’s 529 plan, they would get a state tax benefit of $990 ($20,000 x 4.95%, the Illinois state tax rate).
Wisconsin residents can deduct up to $3,340 of contributions to a Wisconsin 529 plan per beneficiary per year, regardless of filing status. Excess amounts are eligible to be carried forward to future years. The amount of the benefit each year will depend on the contributor’s tax rate and the number of plans funded.
9. When do I have to make the contribution? Assuming the account is already opened, contributions to the Illinois 529 plans must be postmarked on or before December 31 of the given calendar year.
10. Can I invest in whatever I want? No, each state has a list of funds for investment.
11. How often can I change the investments? Twice in a rolling 12-month period.
12. I heard the federal government now allows K-12 expenses to be paid from a 529 plan. Is this true? Yes, the federal government allows it, BUT Illinois has yet to change its statute to allow for those expenses to be considered qualified. At this time, we would not recommend using funds from a 529 plan to offset K-12 educational expenses.
13. What happens if the beneficiary gets a scholarship? In the case of a scholarship, non-qualified withdrawals up to the amount of the tax-free scholarship can be taken out penalty-free, but you’ll have to pay income tax on the earnings.
14. How do I withdraw money from a 529 plan? First, be sure to match the payments of the qualifying expense in the proper tax year, not the school year. There are a few options available for withdrawing money:
1. The school can be paid directly from the 529 account.
2. Money can be moved from the 529 account to your bank account. Expenses can then be paid from the bank account.
3. Expenses can be paid from the bank account first and then reimburse yourself from the 529 account later. This final option may be a good way to pay for expenses like books.
Regardless of the method of payment and withdrawal, be sure to keep good records when moving money from a 529 account. It is your responsibility to report all educational expenses to the IRS.
If this didn’t address one of your questions or you would like more information about 529 plans, please do not hesitate to reach out to us.
This article contains general information that is not suitable for everyone. The information contained herein should not be constructed as personalized investment advice. Reading or utilizing this information does not create an advisory relationship. An advisory relationship can be established only after the following two events have been completed (1) our thorough review with you of all the relevant facts pertaining to a potential engagement; and (2) the execution of a Client Advisory Agreement. There is no guarantee that the views and opinions expressed in this article will come to pass.
Strategic Wealth Partners (‘SWP’) is an SEC registered investment advisor with its principal place of business in the State of Illinois. The brochure is limited to the dissemination of general information pertaining to its investment advisory services, views on the market, and investment philosophy. Any subsequent, direct communication by SWP with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of SWP, please contact SWP or refer to the Investment Advisor Public Disclosure website (http://www.adviserinfo.sec.gov).
For additional information about SWP, including fees and services, send for our disclosure brochure as set forth on Form ADV from SWP using the contact information herein. Please read the disclosure brochure carefully before you invest or send money (http://www.stratwealth.com/disclosure-statement).