We have entered what some would call the most wonderful time of the year with holiday shopping, food, football, friends and family. It’s a time when we make list and decide on who will get what gift and how much they will cost. But this holiday season, I am suggesting you do something different and give a gift that can change a young person’s life, or have lifelong impact. What I am referring to you may ask? I am referring to instead of making that traditional gift of clothes and toys, how about making a gift to that young person’s 529 plan for educational purposes.
Sure, it’s not sexy at the moment, but it can provide an education which will have lasting impact.
529 Plans
A 529 plan is also known as a Qualified Tuition Program which came into existence in 1996. Each program is administered by a state or state agency and allows contributions from parents, friends or family members on behalf of a beneficiary, usually a child or children into this fund. 529 plans are widely known as accounts in which funds are deposited, saved and used to pay for future educational expenses. While that is true, these plans can also be used to prepay college tuition at a qualified higher education institution.
529 Plan at Work
As mentioned there are two ways to engage in a 529 plan. The first is through prepayment of a child’s educational expenses at an educational institution. Contributing through this option allows for the prepayment of all or a portion of the child’s future college tuition at today’s rates which can protect against future increases. The idea is to lock in your 529 contributions and thereby your investing to an account which will mirror increases in tuition rates should they escalate. When you think about it, this 529 option seems likely to make the most sense, but there are some significant restrictions associated. Using the prepaid 529 plans means that they can only be applied to in state colleges. With a traditional or non prepayment 529 plan you are allowed to choose the investment portfolio. However, with a prepayment plan you are not allowed to choose your investments, since the plan manager is focused on ensuring that your investment keeps pace with raising tuition cost. Another drawback of the prepaid 529 option is that if your child does not attend college or chooses to attend an out of state college, you may face restrictions or penalties in withdrawing the funds.
The second and more popular option is where you can choose your 529 contribution fund as an investment account in accordance with the managing agency options.
Plan Flexibility
In the past these plans were more rigid, but with the passage of rule changes, you now have more options to explore. If your child who is a beneficiary has graduated and there is still money in the plan, that money can be used for another child even if they are not your own. The unexpended 529 money can be used to assist a cousin, nephew or other family members without tax consequences so long as it is used for qualified education expenses or for qualifying educational institution tuition. Let’s not also forget the money can be used by the parent if he or she decides to pursue further education.
Another flexible 529 option is for you to convert the unexpended funds into a Roth Individual Retirement Account (IRA). Yes, under the SECURE Act 2.0 you are now allowed to convert that money into an IRA for your kids and thereby providing them with a jump start on their retirement saving plan.
Further, you can leave the excess or unused 529 contributions in the account and allow it to grow tax free. There is no statute of limitation as to how long you can leave your contribution in your state sponsored plan which also allows you to use the plan for your grandchildren. Not only that, if you wanted to assist your child with their student loan payments, you can use up to $10,000 from the 529 plan to do so.
The Takeaway
According to the Education Data Initiative, only 30% of families use a college saving plan such as 529 to help prepare them to face the rising cost of education. This shows that not enough people are taking advantage of this tax benefit from a state perspective, since in some states those contributions are deductible. This data also underscores the need for us to embrace an opportunity to give a gift during this holiday season, which can contribute to changing a child’s life. You might want to reconsider those gifts on your Christmas list, and evaluate where you can have greater impact both now and in the future.
WHAT’S UP! Today’s What’s Up is about getting money out of your retirement without incurring a 10% penalty. Brace yourself, though. If you have received terminal medical news, you can withdraw from your retirement without incurring a 10% tax penalty. Before you draw down any money though, you will have to obtain a doctor’s certification. Also, if you live or have experienced a federally declared disaster, you can drawdown on your retirement without incurring ant tax penalty. And that’s what’s up!
