When you leave inheritances to your loved ones, you are essentially giving final gifts. A college education may be the greatest gift of all, and you can use a 529 college savings plan to pave the way.
We will explain the details here through a question and answer format.
What is the basic structure of a 529 plan?
A 529 plan has a structure that is similar to a Roth individual retirement account. You make contributions into the account after taxes have been paid on the income. The interest accumulates tax-free, and the eventual distributions to the beneficiary are not taxable.
Can you make withdrawals yourself if you unexpectedly need the money?
You can do this, but there is a 10 percent penalty, and the earnings would be subject to regular income taxes.
Can the assets be used to pay all college expenses?
The answer is yes for the most part. Assets in the account can be used to pay for books, fees, tuition, room, and board.
So the funds can be used to go to any college?
As long as the college or university is accredited, the answer is yes if you contribute to a standard, conventional 529 savings plan.
However, there are prepaid tuition 529 savings plans that are specifically tied to attendance at public state universities. The lack of options is a negative, but there is also a positive on the other side of the coin.
You get the tuition rate that is in place in the present, even though the student will be attending in the future when tuition will inevitably be higher.
Are there any limits to the amount of money that can accumulate in the account?
There are different organizations that offer 529 accounts, and they all have their own rules, depending on the state. The low-end limit is $235,000, and there are some accounts that have $500,000 limits.
Can you change beneficiaries if the first beneficiary doesn’t need all the money?
Yes, this is one of the positive features.
Money in the account can only be used for college expenses, right?
Traditionally, these were college savings accounts and the assets could not be used for K-12 education expenses. However, there is a provision in the Tax Cuts and Jobs Act of 2017 that changed the playing field.
You can now withdraw up to $10,000 each year for each beneficiary to help cover K-12 expenses.
Is there anything else I should know about 529 savings plans?
There is a federal estate tax in the United States, and there is also a gift tax. The two taxes are unified, and there is a unified exclusion that can be used to transfer a certain amount tax-free.
Another provision in the Tax Cuts and Jobs Act raised the exclusion to $11.18 million for 2018. There have been a couple of inflation adjustment since then, and in 2020, the exclusion is $11.58 million
Clearly, very few people have estates this large. That being said, if you are one of them, contributions into a 529 plan would no longer be part of your estate for tax purposes.
Access Our Free Estate Planning Worksheet
We have developed an estate planning worksheet that you can go through to gain a more thorough understanding of this important process. It is free, and you can visit our worksheet access page to get your copy.
Schedule a Consultation!
We are here to help if you have already decided that it is time for you to put an estate plan in place. You can schedule an appointment at our office in Ashland, Kentucky if you give us a call at 606-324-5516; the number in Florence, Kentucky is (859) 372-6655.
The number in Charlotte, NC and Huntersville, NC is 704-944-3245, and you can fill out our contact form if you would like to send a message to either location.