National 529 Day!

by Curtis Burkholder

As we continue to discuss ways to have an “Impact” with our time, treasure, and talents, we wanted to highlight that tomorrow is “National 529 Day”! This day was established to focus on the importance of planning and saving for college – through what is known as the 529 plan.  By utilizing a 529 plan, you can help impact someone’s educational life. As you know, education can be expensive. The 529 plan is an excellent way to purposefully plan to save for an individual’s education – whether that be your child, grandchild, or another special child in your life.  If you do not know what a 529 plan is, you are not alone!  Keep reading to learn more about how these accounts can be a helpful and impactful tool when saving for college or K-12 private education.

The 529 plan received its name because it was authorized in section 529 of the Internal Revenue Code. It does not actually have anything to do with the May 29^th other than it’s a great date to highlight this plan!  The 529 is a college savings plan that allows individuals to save for college on a tax-advantaged basis without paying federal taxes on its growth – but only if it is used for qualified higher-education expenses.  A few years ago, the tax laws were updated to allow families to use funds toward a private elementary or secondary education-up to $10,000/year per beneficiary.

If you contribute funds into a 529 account and the original beneficiary does not need the funds for their education, the beneficiary can be changed to another family member.  This provides flexibility in funding and planning for education expenses as funds can be transferred between different siblings as well as down their family line.

It is also important to understand the tax treatment of 529 accounts. There are tax advantages for contributions into a 529 account.  Each state has established their own plan with an investment company so you will receive a state tax deduction for any amount that you contribute into a 529 account.  However, if you live in Pennsylvania, you may claim a deduction for a contribution to any state’s 529 plan.  This means that you have a wide range of investment providers to choose from for the 529 account.   This also means that you can contribute to 529 accounts for your grandchildren even if they live out of state.

Another important element to consider is how 529 distributions are treated from a tax perspective.  If the funds are used for qualified education expenses, there are NO taxes due on the distributions.  However, if the funds are not used for qualified education expenses, the earnings of the non-qualified distributions will be subject to income tax and a 10% federal penalty tax.

Almost anyone can open a 529 account including parents or grandparents.  No matter who opens a 529 account, anyone can contribute to the account for the student.  If you have grandchildren, you can contribute to their college education by establishing a 529 plan for their benefit or using one that is already established. This can also be useful if your grandchildren attend private school, as you can help cover the cost of their education and get a state tax deduction for any contributions made into a 529 account.  The funds in the 529 account can then be withdrawn to be used to pay for the private school tuition.

Hopefully, you have gained a better understanding about 529 plans, as well as the advantages to using them. If you wish to learn more about 529 accounts and how they can be used for your children or grandchildren with great impact, please contact our office and we would be happy to discuss this with you in greater detail. Happy National 529 Day!

Securities America and its representatives do not provide tax advice; therefore, is is important to coordinate with your tax advisor regarding your specific situation.