The 529 college-savings plan has existed for nearly two decades, yet many families still aren’t using it.
A 2012 government accountability office report says that less than 10 percent of families actively saving for college used a 529 or Coverdell plan.1
A 529 plan offers some compelling benefits. Investment gains and withdrawals are federal tax-free if the savings are used toward qualified higher educational expenses. Many states, including Alabama, Mississippi and Arkansas, also provide tax breaks for 529 contributions.
Your Regions Wealth Advisor can help you compare plans and determine whether the 529 is the right savings vehicle for your situation. Some tips that can help you make the most of the 529:
Comparison Shop.
Every state manages at least one 529 plan, and each plan has different rules. You can invest in a plan from any state — not just your own. Considerations include a plan’s investment menu, contribution limits and other rules. Thirty-four states2 offer a tax deduction to residents who invest in their plans. A side-by-side comparison of 529 plans is available on SavingforCollege.com.
Understanding Gifting Rules.
Contributions to a child’s or grandchild’s 529 plan are treated as gifts under federal gifting rules. Under those rules, individuals can give up to $14,000 to a child in 2013 — a couple can collectively give $28,000 — without filing a gift-tax return. Therefore, it may make sense to open a 529 when a child is younger and make annual contributions up to the federal annual gift-tax exclusion instead of waiting until the child nears college age and then contributing a bigger sum. Under special provisions for 529s, an individual can make a one-time $70,000 contribution to a 529 plan ($140,000 for married couples) and prorate it over five years without gift-tax consequences.*
Know Transfer Rules.
Another perk to 529s is flexibility. If your original beneficiary doesn’t use up the savings, you can transfer the savings to another member of your family and keep the tax-free growth and withdrawal benefits. You can also save them for future generations or use the money on your own higher education expenses.
1 gao.gov, A Small Percentage Of Families Save In 529 Plans, Dec. 12, 2012.
2 savingforcollege.com.
*In Order To Avoid The Federal Transfer Tax, No Further Annual Exclusion Gifts Or Generation-Skipping Transfers Can Be Made To The Same Beneficiary Over The Five-Year Period, And The Accelerated Transfer Must Be Reported On Form 709, United States Gift (And Generation-Skipping Transfer) Tax Return. If The Donor Dies Within Five Years, A Portion Of The Transfer Will Be Included In The Donor’s Estate For Estate Tax Purposes.
