Education Savings: A Closer Look at 529 Plans
Aside from your home, your family’s education may be one of the largest cumulative expenses you ever face. That’s why beginning to plan and save early is important to help you stay in balance with other financial goals. And the right investment tools will help ensure your education dollars are working hard for you.
When it comes to achieving long-term investment growth, tax-efficiency and flexibility, most families would be well served by a state-administered 529 education savings plan. One of the biggest benefits of 529s is that earnings accumulated in the plan are not taxable, and withdrawals are tax-free when used for eligible education expenses. While these plans have been around since 1996, several modifications in recent years make them a stronger option than ever.
Whether you’re planning to cover some, or all, of a family member’s education upfront, or at a later date, here are a few things to consider:
- They’re not just for college. Thanks to updated regulations issued in 2017, funds in a 529 may be used for a wider range of expenses, including K-12 private school or trade school tuition.
- You can start with a big lump sum. The IRS treats 529 contributions as gifts, so one person contributing more than $18,000 in a single year would trigger a federal gift tax. One exception, however, allows a contribution of up to $90,000 (five years of contributions at once) in the first year, with no tax consequences. Frontloading the account in this way can make a huge difference in value as the money has more time to grow.
- Any third-party can contribute. Grandparents, aunts and uncles, other extended family members or even friends/third parties who want to help can also make annual contributions to a 529 with the same tax benefits.
- Unused funds are convertible. In previous years, over-saving in a 529 was a concern since withdrawals not used for education expenses incurred a 10% penalty. Beginning in 2024, unused 529 funds can be converted to a Roth IRA in the beneficiary’s name, giving the recipient a head-start on retirement savings.
- You can change beneficiaries. Another option for unused funds is to change the beneficiary to another qualified family member. For example, if your daughter earns a full scholarship, the money you saved could be used for the education of another child, a grandchild, or even a niece or nephew. But before doing so, ensure that family member is eligible.
While the rules can be tricky, the benefits of 529s are worth the extra planning. Consult with Brad Clark at 214.515.4870 or Brad.Clark@frostbank.com on how best to structure your accounts.
Investment management services, financial planning and trust services are offered through Frost Wealth Advisors of Frost Bank.
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