Most people invest in 529 Savings Plans in order to provide a college education for their children. Have you heard, however, that these plans can be an excellent estate planning tool as well?
529 Savings Plans offer a broad list of qualified expenses they will cover, including tuition and fees, room and board, books, supplies and equipment, computers, software, and special needs expenses. The main college costs not covered are transportation, health insurance, and personal expenses. The funds can be used for in-state, out-of-state, or private universities; two-year or four-year colleges, graduate and professional school, and even up to $10,000 per year for K-12 tuition. There is no age limit, and the beneficiary does not need to be pursuing a degree or certificate, so it can be used for continuing education or just for fun.
Another benefit is that contributions to 529 plans are made with after-tax dollars, similar to a Roth IRA. Earnings accumulate on a tax-deferred basis, and distributions are entirely tax-free if used to pay for qualified expenses. There are no annual contribution limits, other than the annual gift tax exclusion. Aggregate limits, once reached, still allow for earnings to accumulate.
Additionally, more than 30 states offer a state income tax break on contributions to their state’s 529 plans, making them superior to a Roth IRA. Seven states provide a state income tax deduction or tax credits for contribution to any state’s 529 plan.
One potential draw-back may be that non-qualified distributions are subject to income tax and a 10% penalty tax on the earnings portion, plus possible recapture of the state income tax breaks. The tax penalty, however, can be waived in certain circumstances (for example, the death or disability of the beneficiary, or if the beneficiary receives other tax-free educational assistance). If the tax penalty is waived, the tax treatment of the investment in the 529 plan is no worse than an investment in a taxable account.
529 Savings Plans can offer substantial benefits for families who use them in their estate planning. Call us today to talk about whether a 529 Saving Plan might be a beneficial part of your estate plan.