A 529 plan can be an excellent way for you to contribute to a younger family member’s college education, while simultaneously paring down your own estate. Contributions to a 529 plan grow tax-deferred, and withdrawals used for the beneficiary’s qualified education expenses are completely tax-free at the federal level (at the state level, as well, in most cases).
There are two types of 529 plans: college savings plans and prepaid tuition plans. College savings plans are individual investment-type accounts offered by nearly all states and managed by financial institutions. Funds can be used at any accredited college in the United States or abroad. Prepaid tuition plans allow prepayment of tuition at today’s prices for the limited group of colleges (typically in-state public colleges) that participate in the plan.
Family members can open a 529 account and name a younger family member as a beneficiary (only one person can be listed as the account owner, though) or they can contribute to an already existing 529 account. You can contribute a lump sum to a 529 account, or contribute smaller, more regular amounts.
A big advantage of 529 plans is that under special rules, unique to them, individuals can make a single lump-sum gift to a 529 plan of up to $70,000 and married couples up to $140,000, while still avoiding federal gift tax exposure. In order to do so, a special election must be made to treat the gift as if it were made in equal installments over a five-year period, and no additional gifts can be made to the beneficiary during that time.
Keep in mind that if you need to withdraw money from a 529 account for something other than college expenses, there is a double consequence: the earnings portion of the withdrawal is subject to a 10% penalty and will be taxed at your ordinary income tax rate.
Our team of professionals at Ambassador Advisors can help you determine the best and most tax-efficient way for you to help ease the burden on your family when it comes to educational costs.
Note: As with other investments, generally there are fees and expenses associated with participation in a 529 savings plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans carefully before investing. More information on 529 plans is available in the issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits. This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.
Ambassador Advisors is a Registered Investment Advisor. Securities offered through American Portfolios Financial Services, Inc. of Holbrook, NY, 631-439-4600 (APFS), member FINRA, SIPC. Investment Advisory Services offered through Ambassador Advisors, LLC. Ambassador Advisors is not owned or operated by APFS.
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