New grandparents often think about ways that they can set aside resources that their grandchildren can use for college, and a 529 college savings plan can be the solution. Of course, many parents have the same goals, but we are going to focus on grandparents in this post because of the estate planning implications.
529 College Savings Plans
A 529 plan is a great way to save money to finance a grandchild’s college education. Plus, in addition to college, the possibilities have actually expanded recently.
In a broad sense, a 529 college savings plan is structured like a Roth individual retirement account. You make contributions into the account after you pay taxes on your income. As a result, the account can grow tax-free throughout its existence.
Tax-free withdrawals can be made by the beneficiary for qualified education expenses, and we are talking about across-the-board expenses. In addition to tuition, money in the account can be utilized for books, fees, supplies, and living expenses.
Traditionally, 529 accounts can only be utilized for higher education expenses. However, when the Tax Cuts and Jobs Act was passed at the end of 2017, the parameters were expanded to allow for payment of K-12 expenses as well. There is a $10,000 per child, per year withdrawal limit for these costs.
Savings Plans vs. Prepaid Tuition Plans
A 529 college savings plan gives you the ability to invest your contributions into a variety of different mutual funds. Ultimately, the resources can be used to pay for any qualified education expenses.
There are also prepaid tuition plans that fall under the 529 umbrella. With this type of plan, you are purchasing credits that can be used for in-state college expenses. An advantage is the fact that you are locked in at the current price point.
Prepaid plans were once more commonly available, but at this point, they are available in a relative handful of states.
More Savings Plan Details
Here in Arizona, you get a state income tax deduction of up to $2,000 a year per beneficiary. You can change the beneficiaries if you ever choose to do so, and this is beneficial if all the money is not needed for the original beneficiary.
There will be a contribution limit, but it is quite generous. It all depends on the plan in question, but for example, the AZ Fidelity 529 plan was a $575,000 limit.
You have the ability to withdraw money from the account for any purpose at any time if you need to do so for some reason. This is another appealing feature, but the earnings would be subject to taxation. In addition, you would be required to pay a 10 percent penalty.
Estate Tax Considerations
People that are not exposed to the estate tax can certainly use 529 college savings plans to provide educational opportunities for their loved ones. At the same time, this type of account can be part of an estate tax efficiency strategy.
The estate tax is unified with the gift tax, but there is a $18,000 per year, per person gift tax exclusion. You can give this much to any number of people within a calendar year free of taxation. If you are married, you and your spouse can give as much as $30,000 to an unlimited number of gift recipients annually.
You could contribute the maximum into a 529 college savings plan for each of your grandchildren. When you do this, you would be decreasing the taxable value of your estate.
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If you are ready to create a comprehensive plan that provides for everyone in your family in the ideal manner, you are making the ideal connection. We can gain an understanding of your objectives and devise an approach that will bring your vision to fruition.
You can call us at 888-222-1328 to schedule a consultation at our Tucson, Oro Valley, Phoenix, or Scottsdale estate planning office. If you would rather send us a message, simply fill out our contact form and we will get back to you ASAP.
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