With the high costs of college tuition and the crippling weight of student loans constantly in the news, it’s no wonder that parents want to start saving for their children’s education ASAP. Qualified tuition plans, also known as 529 plans, offer a tax-advantaged way to start that college nest egg.
The main benefit of a 529 plan is that earnings grow tax deferred. As long as they are used to pay for qualified higher education costs (including tuition, books, room and board, and other education expenses), those earnings remain tax free. The account holder (typically a parent) controls the account for the prospective college student (beneficiary), and anyone, including grandparents and other family members, can contribute to the account. If the beneficiary decides not to attend college, the account holder can designate another beneficiary.
There are no limits on contributions to 529 plans. However, the federal gift tax does apply, making the de-facto limit $14,000 per person per year for 2017.
If earnings are withdrawn from a 529 plan but not used for qualified higher education costs, be aware that those funds are subject to both income tax and a 10% penalty.
There are two types of 529 plans: college savings plans and prepaid tuition plans. Make sure you consult your financial advisor for guidance on which option best suits your family’s needs.
Have questions about how withdrawing money from a 529 plan impacts your taxes? Want to find out about the gift tax implications of giving more than $14,000 to a grandchild’s 529 plan? Taxation Solutions, Inc. is your source for tax info and guidance!