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withdrawn for qualified college or post-secondary expenses.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
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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