529 Plans as a Tool in Education Planning

By VWG Wealth Management on August 2, 2023

Planning and saving for college tuition and expenses is a daunting challenge for most.  VWG advisors can help you and your family understand, and sort through multiple funding options.  We can help model, and update these options during periodic reviews to help you stay on track.

One of the most popular college savings vehicles is the 529 plan.  The name “529” refers to Section 529 of the Internal Revenue Code, which governs these plans. There are two types of 529 plans:
Prepaid Tuition Plans – lets you pre-pay all or part of the costs of an in-state public education.  Subject to limitations, they may also be converted for use at private and out-of-state colleges.

College Savings Plans – on the other hand, these function like investment accounts, offering a range of investment options, including mutual funds, to help grow your contributions over time. You invest after-tax contributions which can then be used for educational expenses.  They offer significant tax advantages, similar to a Roth IRA.

The SECURE Act (which passed in December, 2019) allows families to take tax-free 529 plan distributions for student loan repayment. Principal and interest payments towards a qualified educational loan will be considered qualified 529 plan expenses. However, the portion of student loan interest that is paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction.

The law includes an aggregate lifetime limit of $10,000 in qualified student loan repayments per 529 plan beneficiary and $10,000 per each of the beneficiary’s siblings.

There are 7 major benefits of 529 College Savings Plans:

1. Federal income tax breaks.  Although contributions are not tax-deductible, they grow federally tax-free and will not be taxed when funds are taken out to pay for college expenses including tuition, room and board, and expenses including books.  $10,000 per year in private K-12 tuition is also covered.
2. State income tax breaks.  Over 30 states including Maryland, Virginia, California and Florida, and the District of Columbia, offer a full or partial deduction against state taxable income for contributions to 529 plans.  In order to qualify for the deduction, the contribution must be made to a plan created in the specific state of the donor’s residence.
3. The donor of the 529 account remains in control.  Anyone 18 or older can open a 529 account and be the named donor for a single listed beneficiary.  Others can contribute to the 529 account regardless of who owns (the donor) the account, but only the account owner has control over how money is invested and used.
4. Simplified tax treatment and reporting.  Contributions to a 529 plan are not reported on your federal tax return.  They are treated as completed gifts. For 2019, contributions up to $15,000 ($30,000, if filing jointly) qualify for the annual gift exclusion and do not require to be reported. Additionally, a special IRS provision for 529 plans allows a single person to make a “super funding” gift of $75,000 ($150,000, if married and filing jointly) to a single beneficiary in one year without creating a taxable gift.  Even though the account owner retains control, it is not included in their estate.
5. Flexibility.  The account beneficiary can be changed without penalty to another family member should the account or remaining plan balance no longer be needed by the current beneficiary.  Investment options can be changed twice per calendar year.  529 plan funds can be rolled over into another 529 plan, if needed, once in any 12-month period. Additionally, starting in 2024 account holders will be able to transfer up to a lifetime limit of $35,000 to a Roth IRA for a beneficiary.
6. Liberal eligibility.  Unlike some other education and retirement savings accounts, 529 plans have no income limits, age limits, or annual contribution limits (subject to tax treatment and a very high lifetime contribution cap).
7. Favorable financial aid treatment.  529 plan assets are considered “qualified education benefits” and typically are reported as the account owner’s asset in a financial aid needs analysis. Only 5.64% of 529 plan balances exceeding “Expected Family Contribution” calculations (currently about $20,000) are counted as being owned by the student or the student’s parent’s [1].  This is a significant benefit that could lead to the student getting a greater financial aid package.  For accounts owned by grandparents or other third parties, the account will not affect a student’s financial aid as long as there are no distributions.  Once qualified withdrawals are made, they will be counted as income of the account beneficiary.

VWG Wealth Management is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. All information referenced herein is from sources believed to be reliable. VWG Wealth Management and Hightower Advisors, LLC have not independently verified the accuracy or completeness of the information contained in this document. VWG Wealth Management and Hightower Advisors, LLC or any of its affiliates make no representations or warranties, express or implied, as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. VWG Wealth Management and Hightower Advisors, LLC or any of its affiliates assume no liability for any action made or taken in reliance on or relating in any way to the information. This document and the materials contained herein were created for informational purposes only; the opinions expressed are solely those of the author(s), and do not represent those of Hightower Advisors, LLC or any of its affiliates. VWG Wealth Management and Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax or legal advice. Clients are urged to consult their tax and/or legal advisor for related questions.