Ten Points to Know About 529 Plans
If you have a client, who wants to give money to family members while ensuring it won’t be spent frivolously and yet not use a trust, an excellent way to accomplish this is to establish 529 plans to pay education costs for his or her progeny. Higher education costs are a major life hurdle for many people. According to the U.S. Government, one year of undergraduate education at a private nonprofit institution costs approximately $43,065. [1] That is almost $175,000 for a four year degree. The following are ten key points you should know about 529 plans.
1). What is a 529 plan?
A plan operated by a state or educational institution, with tax advantages and potentially other incentives to make it easier to save for college and other post-secondary training,” according to the IRS. A 529 plan is the same as a qualified tuition program or QTP.
While the plans are named after section 529 of the Internal Revenue code the legal name is “qualified tuition program.” [2] In common with all other financial services or products, these plans come with many rules and exceptions.
2). Can I pay elementary school or high school tuition as well as higher education expenses from a 529 Plan?
Yes, you can. Effective 2018, you can pay tuition for elementary school through high school, but there is a limit of $10,000 per year. Post-secondary tuition is not subject to the cap.
3). Who Can I Name as the Beneficiary?
You can name anyone as the beneficiary, including yourself. And while only one beneficiary is permitted at a time, you can change that beneficiary whenever you wish.
4). If the money goes unspent, can I get it back?
Yes, effectively you can. All you need to do is name yourself as the beneficiary. Then, you can spend the money on yourself either for “qualified education expenses,” as defined by the IRS or on unqualified expenses which can result in a tax penalty.
5). Are contributions to a 529 plan income tax deductible?
No, your contributions are not tax deductible for Federal Income Tax purposes. However, some states offer incentives at the state level. The funds do grow tax deferred and are distributed income tax free if used for qualifying education expenses.
6). Are contributions subject to gift tax?
No, as long as your gift does not exceed the annual gift exclusion of $15,000. Yes, if the amount is over the annual exclusion, although there is a special rule here.
You can front-load the account by giving up to five times the amount of the annual gift exclusion during one calendar year. Currently a total of $75,000. Keep in mind, you have then used your gift exclusion for that person for the next five years, and you will have to file a gift tax return with the IRS to make this special election. [3]
7). Who controls the money in the plan?
The person who created and funded the account controls the money. That person has custody of the funds and is responsible for investing and distributing the money. The beneficiary cannot access the funds unless you name yourself as the beneficiary.
8). How do I pay the college or university from the plan?
When you receive a tuition invoice, you must pay it directly from the funds in the 529 plan to the institution. You will subsequently receive IRS form 1098-T from the college or university. This form will state how much money you paid them out of your 529 plan.
9). What expenses can I pay from the plan without incurring a tax penalty from the IRS?
You can only pay “qualifying educational expenses” which the IRS defines as, “… expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution.” [4] These include tuition, room and board, books, certain technology and equipment required for the different courses, but not travel, student loan repayment, or insurance.
10). How much can I contribute to a 529 plan?
According to the IRS, the contribution limit is the total of all funds required to pay all qualifying expenses for the beneficiary from undergraduate to post-graduate or to professional schools such as law school or medical school. Each state sets the cap for their plan which can be in excess of $500,000 in some states.
How can I find information on 529 plans?
An excellent summary of rules and regulations is IRS Publication 970: Tax Benefits for Education, which you can download here:
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Contributing Writer: Subject Matter Expert Charles McCain
Resources:
[1] https://tinyurl.com/USGovtFastFacts
[2] https://www.irs.gov/newsroom/529-plans-questions-and-answers'