529 Plan Overview: Funding Education

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 Brian King By: Brian King

Of all the options available for funding your children’s education, 529 plans are by far the most popular and—in many cases—best option.

In a nutshell, 529 savings plans are state sponsored, tax-advantaged accounts used specifically for education expenses. Here’s why these plans are beneficial, and how you can best leverage them to your family’s benefit.

1. They’re available to almost anyone—yourself included.

 To open an account, you must be 18 in most states. Most commonly, a parent opens the account with her child as the beneficiary, but grandparents and others may also open them. In most states, nearly anyone can contribute to the plan, regardless of plan ownership. (However, be sure to verify that your specific state allows for this before making any external contributions.)

It’s also possible to open a 529 for yourself, or any other party—related or not. Because of the tax deferral on investment income this plan offers, you (or the recipient) will reap the largest benefit if you have a relatively long time horizon. Plus, if your state allows a tax deduction for your 529 contributions, you’ll receive a potential discount on education expenses, because that contribution amount would reduce your taxable income for state income tax purposes.

2. They offer tax benefits.

A 529 plan provides tax benefits in two ways. First, the sponsoring state may offer an income tax deduction equal to the maximum contribution. (For a full breakdown of income tax deductions by state, reference this comparative guide.) You should also be on the lookout for states that have reciprocity, meaning the state allows a deduction to any 529 plan—not just the contribution made to your resident state’s plan.

Secondly, you are exempt from paying Federal taxes on the investment earnings of your 529 plan. That means your assets will grow tax-free while they remain in the plan. And, as long as you end up using the account balance, you’ll never pay tax on the amounts contributed or growth within the account.

3. Time works in your favor.

The longer you wait to open a 529 plan, the more dollars you will have to put in to fund the same amount of tuition—so it pays to start early. That said, make sure you always prioritize your retirement planning first, because there are multiple options for funding college, but only one for retirement: the amount you’ve accumulated up to that point.

This is a general overview of the benefits of a 529 plan. For more detail on the nuances of the plan, watch for Part 2 of this series: “What Tax Reform Means for Parents” next month. As always, if you have any questions, please don’t hesitate to contact your Wealth Manager.

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Brian King joined the Plancorp team from PricewaterhouseCoopers, LLP in 2008. Now our Chief Planning Officer, he brings his advanced income tax and estate planning experience to Plancorp’s family office practice, where he helps families understand, grow and preserve their wealth. More »