A 529 plan is a tax-advantaged savings plan designed to encourage
savings for future college costs. 529 plans, legally known as “qualified
tuition plans,†are sponsored by states, state agencies, or educational
institutions.
There are two types of 529 plans: pre-paid tuition plans and college
savings plans. All fifty states and the District of Columbia sponsor at
least one type of 529 plan. In addition, a group of private colleges and
universities sponsor a pre-paid tuition plan.
Before the Obama administrations proposal to phase out 529 college
savings plans, many clients with young children had never heard of this
tax-advantaged financing tool.
Here are a few basic points and benefits:
1. Pay no income tax on earnings- Your 529 account money grows and is
postponed from federal and state income taxes if spent on qualified
education expenses. Qualified education expenses include tuition and
mandatory fees, such as: books, supplies, equipment, the full cost of
room and board, and certain additional expenses for special needs
students. Housing facilities must be owned or operated by the college,
however, off-campus room and board costs can be eligible expenses, and
are subject to certain limits.
2. Assets of the plan are controlled by the individual who establishes
the account (the owner of the account), not the beneficiary. If you’re
the account owner and you live in Missouri, you can deduct up to $8,000
($16,000 if you’re married filing jointly) of your 529 Plan
contributions when you file your state income taxes.
3. Plan beneficiaries can be changed by the account owner for any
reason. For example, if the original intended beneficiary receives a
full scholarship, a younger sibling can benefit from those funds.
4. There is a penalty for using the account for non-qualified purposes,
however, the 10% penalty is applied only to earnings, not the original
contribution amounts.
5. You can contribute up to $14,000 per year ($28,000 if married filing
jointly) without triggering federal gift tax. If you’re interested in
making a larger lump-sum contribution, you can contribute up to $70,000
($140,000 if married filing jointly) per beneficiary and then treat it
as though you contributed that amount over a 5-year period. However, you
can’t make additional gifts to the beneficiary during that time without
incurring gift tax. This opportunity can be beneficial to grandparents
seeking to remove assets from their taxable estate.
