529 Plans

For well over a decade, college tuition rates have been rising much faster than inflation. Between the 2004-05 and 2014-15 academic years, prices for undergraduate tuition, fees, room and board at public institutions rose 33%! While private nonprofit and private for profit institutions did not rise quite as fast—26% and 18% respectively, how can working families prepare for the high cost of higher education?

A 529 Plan may be your answer. A 529 Plan is an education savings plan designed to help families accumulate funds for future college costs. It gets its name from Section 529 of the Internal Revenue Code which created these types of savings plans in 1996. These savings plans are operated by a state or
an educational institution. Each plan is for a designated beneficiary. While this is most often a child or grandchild, a plan may be set up for anyone. And a beneficiary may receive contributions from multiple 529 accounts.

What are the advantages? While contributions are not deductible on your federal return, the earnings of your 529 Plan grow federal tax-free and remain tax-free when the money is used to pay for college. More than 30 states, including South Carolina, offer full or partial tax deductions or credits for 529 Plans.
You retain control of the funds so you can be assured the money will be used for its intended purposes. And people other than the account holder can contribute to the 529 Plan. Unlike some other savings vehicles, there are no income limits or age limits.

529 Plans offer flexibility. You can change investment options two times each calendar year and you may roll over funds into another 529 Plan one time in a 12-month period. You are not limited to the 529 Plan offered in your state of residency, although it’s usually in your best interest since most states allow
a deduction on your state return.

Contributions to a 529 Plan cannot be in excess of the anticipated beneficiary’s qualified education expenses—tuition, fees, books, room and board. If you have excess money in the account, you may transfer it to another beneficiary to avoid penalties. Contributions in excess of $14,000 per year create a gift tax filing requirement although there is almost always no gift tax due.

Withdrawals have no tax implications so long as they are used for qualified purposes. Earnings on nonqualified withdrawals are subject to federal income tax plus a 10% penalty.

Is a 529 Plan right for you? If there is someone you will be assisting with college and/or post graduate education expenses, a 529 Plan is a good tax savings tool. You should determine the approximate amount needed for the beneficiary in order to avoid taxes and penalties on excess contributions unless
there is another beneficiary to whom you may transfer the balance for their qualified expenses. Even if your child is ready to start college or is already in college, it’s not too late to benefit from a 529 Plan. Make a contribution to the plan and then immediately withdraw it to pay for college. You’ll still receive the state deduction benefit.

If you have questions about 529 Plans or any other financial concern, we’d like to talk with you. We can help with any and all of your financial questions. We are committed to your financial success!

Bradshaw, Gordon & Clinkscales, LLC