529 College Savings Plans not just for college
February 10, 2019
I would first like to thank all my readers that sent supportive emails regarding last month's article on the importance of Career Technical Education (CTE). It's encouraging to see so much support for an educational pathway that needs to be properly funded and restored in our schools. With that support in mind, a review of an important Career Technical Education tuition funding vehicle is appropriate.
Many families save for post-secondary education through vehicles called 529 College Savings Plans. But many do not realize that some career technical education schools may be a qualified institution which allows the funds to be withdrawn tax free from 529 plans to pay for the tuition, fees, books and more. College Savings Plans are not just for college. So how do you find out if your tech school qualifies for this significant tax break?
WHAT IS AN ELIGIBLE EDUCATION INSTITUTION?
Funds in a 529 plan can pay for qualified expenses at any private or public college, university, or technical school in the country and abroad that qualifies for federal financial aid. You can look up eligible institutions by visiting the Department of Education website fafsa.ed.gov.
WHAT ARE QUALIFIED HIGHER EDUCATION EXPENSES?
Qualified expenses include tuition, fees, books, supplies and equipment required at an eligible educational institution. Room and board is also included if the student is enrolled at least part time. (Limits are set by the educational institution.)
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WHO CAN CONTRIBUTE TO A 529 PLAN?
Anyone can contribute to a 529 regardless of age or income. Among others, this includes an individual, a corporation, guardian, or any person acting in a fiduciary capacity. Local governments and some nonprofit organizations may also participate.
WHAT ARE THE CONTRIBUTIONS LIMITS?
The maximum amount that can be contributed to a 529 account is established by the relevant state program's rules and may be changed each year to reflect the increasing costs of higher education. Once this limit – by contribution or appreciation – is reached, no additional contributions are permitted. Currently, the maximum is more than $520,000. Of course, there is no limit on the amount the account can grow.
For tax purposes, most literature suggests a limit of $15,000 per year, the current federal gift tax exclusion limit. By staying under this limit, you do not tap into your lifetime gift-tax exclusion.
A unique feature of the 529 is a rule that allows for five years of contributions up front without gift-tax consequences. By filing Form 709, a single filer can contribute a lump sum up to $75,000 ($150,000, if filing jointly) to each beneficiary.
If this lump-sum contribution is made, additional contributions or other gifts to the same beneficiary within the five-year period are possible but would reduce the lifetime gift tax exclusion. The idea is that a large, early contribution has a chance for more tax-free growth than smaller contributions made annually.
WHO CONTROLS THE 529 PLAN?
The 529 plan requires an owner/participant, a contributor and a beneficiary.
In most cases, the owner and the contributor are the same person. Typically, the beneficiary is a child or grandchild, but can be an unrelated person – or the owner, contributor and beneficiary can all be the same person. The point of the legislation is to allow funds to be saved for educational purposes, not exclusively for traditional college students.
A popular aspect of the 529 is that the owner controls the account and the money inside it. While the contributions are considered a completed gift to the beneficiary, legal rights to the money usually stay with the owner indefinitely.
For example, grandparents can set up a 529 for each grandchild, reducing their estates while retaining control of the money. They can even take back the funds if they so choose, although they would trigger taxes and a 10 percent penalty on the earnings portion if the funds were used for something other than education. Nevertheless, 529 funds remain the owner's property.
BENEFICIARY AND OWNERSHIP DESIGNATION RULES
An often-overlooked consideration is that there may be – in rare instances – situations where the rules of ownership can be important. For example, these rules may come into play if a grandparent who opened an account later decides to have his or her child assume ownership. Plan details vary, so check the specifics to determine what ownership changes are allowed.
The owner can change the account beneficiary at his or her discretion, an especially important feature when comparing a 529 to a Uniform Gifts to Minors Act/ Uniform Transfers to Minors Act account. With a 529, if the beneficiary cannot use the plan for higher education, the account can be transferred to another beneficiary as long as they are in the same family.
Mary Owens, Principal/Branch Manager, RJFS, 426 Sutton Way, Suite 110, Grass Valley, CA 95945, 530-272-7500. Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Owens Estate and Wealth Strategies Group is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Raymond James does not provide tax advice. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Mary Owens and not necessarily those of Raymond James. Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 college savings plans before investing. More information about 529 college savings plans is available in the issuer's official statement, and should be read carefully before investing. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents which should be considered.
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