Got a kid or grandchild headed to college….sooner or later? December is a great time to set up and contribute to a 529 plan, to take advantage of this year’s annual gift exclusion amount. 529 plans are an efficient and cost effective way for parents and other family members to help pay for accredited post-secondary educational expenses. “529” is a reference to the Internal Revenue Code section setting out the terms and conditions for qualified tuition plans. All 50 states and the District of Columbia, as well as many state educational institutions, provide or spo nsor 529 plans where income earned on assets are not subject to federal income tax and may not be subject to state income tax if ultimately used for qualified educational expenses.
Properly structured contributions to 529 plans can also avoid federal gift tax. Annual contributions of up to the annual gift tax exclusion amount per beneficiary ($14,000 in 2017 and $15,000 in 2018) are not subject to federal gift tax (provided no other gifts are made to the beneficiary during that year), plus married couples may effectively double their contributions. In addition, contributions also may be front loaded for up to five years, provided the donors file a federal gift tax return to make the five-year election. However, in order to take advantage of front loading annual exclusion amounts, the donors must survive for the entirety of the five-year period; if the donors pass away during the five-year election period, contributions allocated to the remaining years after death will be included in the taxable estate of the donors.
529 plans can be either pre-paid tuition and savings plans. Pre-paid tuition plans generally only cover tuition and mandatory fees and allow the purchaser or custodian to purchase credits or units for the current or future student at participating colleges and universities at a locked-in price. Some plans also provide for room and board option and may require residency in the sponsoring jurisdiction. Educational institution can only offer prepaid tuition plans.
The more popular options are the savings plans, also known as savings accounts, which can cover not only tuition and mandatory fees, but also room and board and the cost of computers, related equipment, and internet access and other technology related services. The donor chooses the investment options for the plan, which may include stock mutual funds, bond mutual funds, and money market funds. Some investments are not federally insured and do not always guarantee growth or return on investment. Unlike some pre-paid tuition plans, savings plans do not contain residency requirements, but some plans limit aggregate contributions to a specified amount. Unlike the prepaid plans, no guaranteed or locked-in price advantages are offered.
For additional information, contact your financial advisors, or review online information provided by the IRS or the SEC.