Back to School- 529 Savings Plans

529 Savings Plans were created back in 1996 to allow individuals a tax-advantaged way to save and pay for education expenses. These plans have been very successful. In fact, The Center for Social Development found that children who have a 529 plan are approximately three times more likely to attend college. We will discuss the plans available and how they work. 

Types of 529 Plans in Illinois

Currently in Illinois, you can utilize two providers for 529 plans. One of the providers is Bright Star.  Here, participants manage the 529 plan on their own. The second provider is Bright Directions. This provider allows financial advisors to manage the 529 plan for you. Managing the plan involves selecting the custodian and beneficiary, as well as choosing the investments.  The custodian, an adult, is the person who makes the decisions for the plan.  Primarily this includes handling contributions, investments, and distributions.  The beneficiary is the person, usually a minor student, who will receive the funds for education expenses.  The investments are usually mutual funds, although many plans are now adding ETF’s to their portfolios.  It is important to note, whether you manage it yourself or utilize a financial professional, you are limited to two trades per calendar year. So, investment selection is critical.  Also, these plans allow great flexibility to change the beneficiary.  This is especially important if the original student decides not to continue their education.  The custodian can select another beneficiary who can utilize the funds. 

Contributions

The amount of money you can contribute to a 529 plan varies from state to state. Normally, the plans are limited to what the state deems necessary to finance or cover education expenses. Regardless, all contributions grow tax-deferred while invested in the plan. In 2018, individuals can contribute up to $15,000 dollars without incurring a federal gift tax. Alternatively, an individual may contribute up to $75,000 ($150,000 married couples) as a lump sum for a 5-year period. However, if you choose this path, then no other contributions can be made during this 5-year time-frame.

Tax Benefits

On the federal level, earnings grow tax-free and distributions are tax-free when these funds are withdrawn for qualified college or post-secondary expenses.  If you live in Illinois, you will receive an added state tax benefit too. Contributions into a 529 plan are tax deductible, meaning parents will enjoy a deduction of up to $10,000 each ($20,000 if married filing jointly) on their state tax returns. In addition, no state income tax is paid on earnings or distributions that are used for qualified education expenses. Qualified education expenses include:

·      expenses required for the designated beneficiary's enrollment in – and attendance at – an eligible school
·      tuition and fees
·      books, supplies and equipment
·      academic tutoring
·      room and board
·      uniforms
·      transportation
·      expenses of a special-needs beneficiary that are necessary for that person's enrollment or attendance at an eligible educational institution

Keep in mind, if any money is used to pay a non-qualified college expenses, it is subject to income tax, as well as an additional 10% federal tax penalty.

Tax Law Changes for 529 Plans

Traditionally, 529 plans were only available to pay for post-secondary education expenses.  That is until now. In 2017, effective in 2018, Congress expanded the 529 plan to cover tuition at elementary, or secondary public, private or religious schools. Distributions for K-12 are limited to $10,000 or less per calendar year and can only be used for tuition.  No other related expenses qualify.

With this change, it may make sense to open two 529 plans. One dedicated for K-12 tuition costs and another for post-secondary or college education expenses.

Summary

529 Savings Plans are a great investment vehicle to help pay for the increasing costs associated with education. These plans are easy to set up, transferrable and offer substantial tax advantages.

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.  Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Griffin Financial Advisors, LLC. The opinions expressed are those of Griffin Financial Advisors, LLC and are subject to change at any time due to the changes in market or economic conditions.

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