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Why Contributing to a 529 Plan Should Be at the Top of Your To-Do List

Photo by Ann Danilina on Unsplash
Photo by Ann Danilina on Unsplash

Contributing to your child’s future has many financial benefits.

Whether your child is 9 months or 5 years, I implore you to consider opening a 529 Plan and start contributing consistently. Looking for the best possible way to fund your child’s education should be at the top of your to-do list for many reasons – The cost of college increased by more than 25% in the last 10 years. The price of college is increasing 8x faster than wages. Further, due to COVID impacts like teacher shortages, remote learning, and funding shortages, parents are moving their kids to private schools at an exponential rate. Also, you may be surprised to learn there are many financial benefits to opening a 529 Plan for your child. I explore several below.

Pay for qualified education expenses with tax-free money

Your 529 Plan can be withdrawn tax-free to pay for qualified higher education expenses like tuition, fees, books, and computers. Additionally, your earnings grow tax-free. You may withdraw up to $75,000/year per beneficiary ($150,000 for married couples) for qualified expenses. There are some unqualified expenses commonly assumed to be qualified like travel, personal living expenses, and test-prep courses.

You may also be surprised to learn that your 529 Plan contributions may also be used to pay private, public, or religious primary or secondary school tuition payments. You may withdraw up to $10,000/year per beneficiary. Disclosure, not all states are on board. Check the list here to see if your state has adopted this expense. As always, consult with your tax professional for any updates.

Write off contributions on your state income return

While you are not able to reduce your federal taxable income, most states allow you to write off contributions on your state income return. See link for participating states.

Your contributions are not limited by your income

Unlike other plans such as UTMA/UGMA and Coverdell Education Savings Plans, 529 plans do not have a limit on contributions based on your income. They also do not have limits on annual contribution limits. However, it is affected by gifting limits, explained below.

Estate planning benefits

Contributing to a 529 Plan can also reduce a taxable estate as contributions are considered “completed gifts” for estate tax purposes. Please note that gifts over $15,000/year typically require a form to be completed for the IRS. Also, those funds over $15,000 must be counted toward the individual’s annual gift tax exclusion limits. With that being said, you are able to gift $75,000/beneficiary in a single year as a lump sum. Any amount gifted in those 5 years ($15K x 5 years) over that gift will go toward the lifetime gift exclusion.

In Conclusion

If you have been on the fence about whether or not to open a 529 Plan I hope this gives you the information and confirmation you need to start today. These options are open to all – grandparents can establish a 529 for their grandchildren or you can start one for your niece or nephew. Our children are our future. It is imperative we start planning for that future now instead of leaving the burden to them. After all, it does offer you a financial benefit on top of peace of mind.


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