Here are a few hidden aspects of the 529 Plan that you may not know about.
Contribution limits are quite high, and you can choose to “superfund” a 529 plan.
Maybe grandma or grandpa or a relative would like to contribute generously to your 529; they can superfund the plan up to $70,000 per year without a gift tax penalty. This is above and beyond the $14,000 per year limit because super funding treats the gift as if it came in over a five-year period. This gift benefits grandparents or generous relatives as the amount is transferred out of the donor’s estate and into a tax-deferred (and potentially tax-free) investment for college.
What happens when your honor student gets a scholarship, and you have worked so hard to save in a 529 plan?
In addition to the ability to transfer the funds to another eligible family member of any age, you can make a withdrawal from the plan in the dollar amount of the scholarship without paying the 10% penalty. It does not have to be used for qualified expenses like tuition or room and board because these costs are covered by the scholarship. The earnings portion of the withdrawal would be taxable but would not be subject to the penalty.
A 529 plan can be set up for anyone at any age.
If grandma and grandpa want to go back to school, they can use the funds to pay for college.
Find out if there any tax benefits offered through your state.
If not, you can shop around and invest in another state’s plan that may have lower fees and additional investment options that your state may not have. It makes no difference where you invest, the funds in a 529 plan can be used for any accredited college around the world.
Qualified expenses go beyond tuition and room and board.
Basically, anything necessary for college can be covered. Yes, things like computers, internet, required course fees all are considered qualified expenses. Exceptions are elective activities like sports, extracurriculars, parking passes or miscellaneous entertainment costs.
Know your investment plan and how it works.
Many plans offer an age-based portfolio that adjusts the portfolio’s asset allocation to an appropriate risk level as you get closer to needing the funds. Most plans allow you to change the investment portfolio at least once a year or if you change the beneficiary.
Are you considering private colleges?
There is a private college 529 plan which functions much like a “pre-paid” tuition plan. It is NOT an investment. It is NOT affected by how much tuition increases over the years or changing financial markets. You purchase tuition certificates that lock in today’s cost. The increase in value and distributions are federal tax-free when used to pay for college just like other 529 plans. The money saved in the plan can be used to pay for the cost of attending over 300 leading private colleges and universities nationwide. Top schools like Stanford, Princeton, TCU, Notre Dame, Kenyon, Case Western Reserve, John Carroll and hundreds more. Private College 529 is the only 529 plan not run by a state. Participating colleges and universities own the plan, and they guarantee the tuition you prepay.
What happens if your student chooses a Military academy and to serve the country afterward?
No tuition, so what do you do with your 529 money? You could transfer the beneficiary to another child, or yourself. If not, you can withdraw the money and avoid the 10% penalty. The Military Family Tax Relief act of 2003 provides that if you attend a U.S. Military this will be treated as a scholarship for purposes of non-qualified withdrawals from a 529 plan. However, like a scholarship, the earnings portion of the account will be taxable.
In the unfortunate event of death or disability of your 529 plan beneficiary…
You can transfer the plan’s benefits to another beneficiary, or you can authorize a payment to the estate of the deceased. Although subject to federal, state and local taxes, the earnings portion will not be subject to the tax penalty. Disability – you may select a new beneficiary or withdraw all or part of the money. Just as in the event of death, there is no tax penalty on the earning portion, but will be subject to taxes.
Considering less than a 4-year degree?
Funds can be used for post high school learning institutions like trade schools such as cosmetology, culinary or technical colleges, community colleges, graduate school, international schools, theological seminaries, or online colleges. If you have funds remaining, you can continue to use those funds for graduate, medical or law school among others. About 400 international schools qualify.
What if you want to rollover your account?
You can choose to move your funds from one 529 plan to another and sometimes you can do so without penalty. If you rollover funds from one plan to another for the same beneficiary there is no penalty or taxes. This can only be done once within 12 months for the same beneficiary. If you move funds from one plan to another and change the beneficiary, you will face no penalty if that beneficiary is a member of the former beneficiary’s family. Any tax credits you may have received with your state on your original deposits, the state may look for you to pay those credits back.
Remember a dollar saved for college beats a dollar borrowed for college. 529 Plans are the tax-advantaged way to save for college through tax-free earnings and tax-free withdrawals for 529 qualified higher education expenses.
Feel free to contact us today to get started on your 529 Plan and start taking advantage of any state tax deductions available too. In Ohio, you can deduct up to $2,000 from your Ohio taxable income per beneficiary per year.
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