By: Frazier Allen, Raymond James Financial Services
Saving for your child’s educational future is something we all do. 529 savings plans are tax-advantaged education savings vehicles and one of the most popular ways to save for college today. Did you know they can also be used to save for K-12 tuition? Much like the way 401(k) plans changed the world of retirement savings a few decades ago, 529 savings plans have changed the world of education savings.
529 savings plans offer a unique combination of features that no other education savings vehicle can match:
• Federal tax advantages: Contributions to a 529 account accumulate tax deferred and earnings are tax free if the money is used to pay the beneficiary’s qualified education expenses.
• State tax advantages: States are free to offer their own tax benefits to state residents, such as a tax deduction for contributions.
• High contribution limits: Most plans have lifetime contribution limits of $350,000 and up.
• Unlimited participation: Anyone can open a 529 savings plan account, regardless of income level.
• Wide use of funds: Money in a 529 savings plan can be used to pay the full cost (tuition, fees, room and board, books) at any college or graduate school in the United States or abroad that is accredited by the Department of Education, and for K-12 tuition expenses up to $10,000 per year.
• Professional money management: 529 savings plans are offered by states, but they are managed by designated financial companies who are responsible for managing the plan’s underlying investment portfolios.
• Flexibility: Under federal rules, you are entitled to change the beneficiary of your account to a qualified family member at any time as well as rollover the money in your account to a different 529 plan once per calendar year without income tax or penalty implications.
• Accelerated gifting: 529 savings plans offer an estate planning advantage in the form of accelerated gifting. This can be a favorable way for grandparents to contribute to their grandchildren’s education while paring down their own estate, or a way for parents to contribute a large lump sum.
Although 529 savings plans are a creature of federal law, their implementation is left to the states. Currently, there are over 50 different savings plans available because many states offer more than one plan. You can join any state’s 529 savings plan, but this variety may create confusion when it comes time to select a plan. Each plan has its own rules and restrictions, which can change at any time. With so many plans available, it may be helpful to consult an experienced financial professional who can help you select a plan and pick your plan investments.