Westchester, NY – 914.747.1760 | Manhattan, NY – 212.671.1972 |mgse@emersonec.com
Westchester, NY – 914.747.1760 | Manhattan, NY – 212.671.1972 |mgse@emersonec.com

529 Plans Explained

529 Plans Explained

Emerson Educational Consulting welcomes guest blogger Joel Peck, CPA.

What are the major benefits of 529 Plans?

Money invested in 529 plan accounts grows tax-free if used for tuition, room and board and other qualifying expenses.

The reality of this was driven home last year as much of the stock market was up 20%. If you had a 529 account with $50,000 at the beginning of 2017 that was invested in a market-tracking fund, you’d have $60,000 today, AND that $10,000 increase would be tax-free! This was an unusual increase judging by the past ten years.

Be aware – you have control over how your money in the 529 is invested. If you had the account invested in a money market type fund, instead of growing $10,000 last year, it would have only grown $500.

Be aware – your account is subject to market fluctuations. Most plans have what is called an “age-based fund. This option takes your child’s into account and gradually moves the money from riskier to safe investments as college nears. You can choose from a broad variety of investment choices, all suited to your level of risk.

What is the difference between the owner, the custodian and the beneficiary?

Owner – The person who opens and funds the account (usually parent or grandparent)

Custodian – The institution where the money is invested

Beneficiary – The future college student

For other definitions, https://www.collegeinvest.org/tools-resources/glossary

What are the differences if I open a 529 account at a bank, with my broker, or online?

The two main differences are cost and service. If you invest in any of the state-run plans (CT Higher Education Trust, MA U.Fund College Investing Plan, NY 529 College Savings Program, PA 529 Investment Plan), their fees are usually lower than standard brokerage fees or through a bank. Likewise, service and advice are limited with the state-run online plans as compared with brokerage and bank plans.

Deposits to a 529 plan are considered gifts and, therefore, subject to gift tax limits. The annual gift limit is currently $15,000 from each giver to each recipient ($30,000 to each child from both parents). Plus, there is a little known IRS rule that allows you to front-load a 529 plan for up to five years ($30,000 x 5 = $150,000).

Some states provide tax deductions for money added to these plans each year with certain limits. (Keep in mind that the tax deductions are not available to reduce your federal taxes.)

You may reach Joel at joel@joelpeckcpa.com

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