This post is part of Acuity’s Master Class Series, dedicated to shedding light on financial and other influential industry topics. Our goal is to provide a deeper understanding of the business community to empower their strategic decisions.
What is a 529 plan?
According to the U.S. Securities and Exchange Commision, a 529 plan is “a tax-advantaged savings plan designed to encourage savings for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.”
We recently sat down with Jason Ackerman, CPA at BNA, a firm providing tax, accounting, and consulting services to individuals and professional service firms, to gather insights into 529 plans. Here are the highlights from the Q&A.
Tell us a bit about 529 plans and why people are using them today.
College is getting more and more expensive. To afford the tuition, people are looking for ways to save for college when their children are born. A 529 plan is a great investment vehicle to do that. It’s basically like an IRA, but for your kids’ college. You put the money in an account, it grows tax-free, and when you take the money out you don’t have to pay taxes on it. Most states allow for at least some deduction when you put the money in, so you’re getting a tax deduction plus a tax-free vehicle – pretty good deal.
Does it matter what state plan you invest in based on where you live?
529 plans vary state by state, but most states allow non-residents to invest in their plan. So, if you’re in a state that doesn’t have a tax deduction, you should pick the best plan based on the investments that you want to focus on.
What do people need to know when choosing a 529 plan?
First, figure out if you’re in a state that offers a tax incentive through deductions. South Carolina (where BNA is headquartered) offers unlimited deductions and, if you roll a plan over from another state, you can receive an additional deduction. Savingforcollege.com is the mecca for 529 plan knowledge and ranks every state’s plan. Go check out each state’s investment portfolio and see how it compares.
What should people know about taking money out of these plans?
It has to be used for qualified educational expenses. This includes tuition and also the cost of living – like room and board, books, etc. If you go to the college’s website, you should be able to find the cost of attendance. That number is basically what you can pull money out of your 529 plan for.
What if I put in $400,000 and my kid uses only $300,000?
The great thing about 529 plan is that you can transfer the funds to your other kids. If you’ve still overplanned and eventually take the money out, there is a tax and penalty on the earnings.
Any 529 plan pitfalls people should look out for?
Keep in mind that, when you contribute to the 529 plan, it’s considered a gift to your child. If you contribute more than $14,000 (or more than the gifting limit), you have to file a gifting tax return. We recommend only contributing up to the gifting limit. So, a married couple should contribute a max of $28,000 to their 529 plan. That being said, there is a special rule where you can donate up to five years of gifts ($70K/giftor) to a 529 plan without it exceeding the gift threshold. Honestly, I’ve never been involved in a situation where people saved too much for college. The biggest thing to look out for is to get to those college years and realize you don’t have enough saved. Our advice is to try to start saving as early as possible so that you’ll be covered when the time comes.
Lightning Round 529 Plan Questions
What state has the best 529 plan?
South Carolina for South Carolina residents. My number two pick would have to be Nevada.
What state offers the best 529 plan incentives?
South Carolina. But there are certain states that allow you to take a deduction, even if you’re not contributing to that state’s plan: Arizona, Kansas, Maine, and Pennsylvania. There are also certain states that give tax credits: Indiana, Utah, and Vermont. But very few states allow an unlimited deduction and unlimited rollover deduction: New Mexico, Colorado, and South Carolina.
If you invest in a state’s 529 plan do you have to go to college in that state?
No. It just has to be on the US Department of Education’s list of eligible schools.
How will the new tax laws affect 529a plans?
Taxpayers will now be allowed to use 529 plans to pay $10,000/year/child for qualified public, private, and religious elementary and secondary schools.
Anything else people should know about 529 plans?
You need to figure out how long you have to hold the money in the account before you can get the deduction. In South Carolina, there’s no time period. So, even if you haven’t saved for college and you’re paying for your child, you can run it through your plan and get the deduction. In Georgia, married couples get a $4,000 tax deduction per child per year.
Interested in learning more about 529 plans? Need a trustworthy advisor to help you navigate the ins and outs? Shoot the experts over at BNA a quick note at [email protected].
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