529 College Savings Plans: For Education and Estate Planning

529 College Savings plans are essential for saving for higher education expenses, and if used for education, accumulate tax-free. Since 529 plans came into existence in 1996, their popularity has continued to increase, with 529 plan assets crossing the $400 billion mark in 2021, according to Morningstar.

529 plans are qualified tuition plans that allow state and federal tax-free withdrawals of earnings and have the potential for tax deductions, which help offset the increasing cost of secondary education. 529 plans can be used in every state to pay for K-12 education expenses at private schools. Here is more about 529 plans you may want to know:

There are two types of 529 plans-

  1. Pre-paid tuition plans- These 529 plans allow the account owner to purchase credits for later use at participating colleges or universities to pay for tuition.
  2. Education savings plans. The federal government guarantees education savings plans but not against loss due to the investment’s performance. Education savings plans utilize an investment account to save for the beneficiary’s future qualified higher education expenses, including room and board, fees, and qualified equipment expenses. 529 plans can now be used in every state to pay for K-12 education expenses at private schools.

529 plans can be a strategy to transfer wealth-

Under the 2017 Tax Reform Act, an individual contributing to a 529 savings plan can frontload $75,000 (or five years’ worth of contributions) into one year without incurring federal gift taxes. A married couple who are parents, or grandparents, could contribute $150,000 into their grandchild’s 529 plan. It’s a unique way to transfer wealth for those who wish to make education a part of a legacy that provides a tax deduction and no federal gift taxes. The bonus is that this strategy can be for each child or grandchild.

Another feature of using a 529 plan inside an estate plan is that the contributor/account owner retains control of the assets and rights to the dollars in the 529 plan.

Typically, 529 plans allow the contributor/account owner to change the account’s beneficiary at any time. However, if the 529 plan is used inside a trust or as part of an estate plan, changing the beneficiary can have adverse effects if the trust or estate plan is ever contested. Therefore, using a 529 plan within an estate plan requires due diligence and should involve a financial professional, attorney, and tax professional before using this strategy.

Questions about 529 plans for college or estate planning? Contact our office today to discuss your situation and if a 529 plan is suitable for you.



Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Fresh Finance.

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