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TAX TALK: Saving for college through a 529 savings plan

Posted by Hal Zemel, CPA, J.D., LL.M. on Nov 16, 2015 11:23:52 AM
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You should start saving for your children’s college education long before they start attending college. Saving through a Section 529 plan may provide you with several benefits. While contributions are not deductible for federal purposes, the plan assets can grow tax deferred. Some states, like New York, do provide a tax deduction for contributions to the plan.

If distributions are used to pay qualified expenses (i.e. tuition, mandatory fees, books, equipment, supplies and certain room & board), there will be no tax on the distribution for federal purposes and for many state purposes as well, thus converting the tax deferral into a permanent tax savings on the deferred income. Any distributions not used to pay qualifying expenses, will be subject to income tax and a 10% penalty in the earnings portion of the distribution.

529 plans offer other benefits as well:

  • In relation to other tax deferred arrangements, they usually offer high contribution limits, and there are no income limits for contributing.
  • There’s generally no beneficiary age limit for contributions or distributions.
  • You can control the account, even after the child is of legal age.
  • You can make tax-free rollovers to another qualifying family member.

Finally, 529 plans provide estate planning benefits: A special break for 529 plans allows you to front-load five years’ worth of annual gift tax exclusions and make up to a $70,000 contribution (or $140,000 if you split the gift with your spouse).

The biggest downside is that depending on the plan, you may have limitations on your investment options, when you can change your investments, and your lifetime contributions.

Questions? Please contact us for more information on 529 plans and other tax-smart strategies for funding education expenses.

Hal Zemel, a Tax Principal at Berdon LLP, has more than 20 years in public accounting and advises businesses in the real estate, service, and manufacturing sectors.

Topics: TAX TALK

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