Plan Accounts Are Investment Vehicles
First, the basics: Although 529 plans are often referred to as college savings plans, the contributions you make dont just sit there until you decide to use them. Rather, 529 account funds are invested and given the opportunity to grow which also means they can shrink, depending on market conditions.
Your 529 plan has more in common with your 401 than your savings account. If you understand the tax benefits and implications of your 401, many of the same principles apply to a 529: You can maximize the tax advantages by opening the account when a child is young, for instance.
The earlier you invest, the greater the potential for the funds to grow. This means you could invest and grow your college savings and keep up with inflating college prices.
Many States Have 529 Tax Deductions For Contributions
Although you cant receive 529 tax benefits on your federal income tax return, you might be able to on your state tax return.
More than 30 states, plus the District of Columbia, offer a 529 tax deduction or credit, allowing you to write off 529 contributions and lower your state income tax burden. That can free up more money to save for your childs education.
Deductions vary by state, and some are more generous than others. Indiana, for example, offers a 529 tax credit equal to 20% of contributions up to $5,000, which means a maximum credit of $1,000. Vermont provides a 10% tax credit for contributions up to $2,500 with a maximum $250 credit per taxpayer for each beneficiary.
Overview Of Gift And Estate Tax Rules
If you give away money or property during your life, you may be subject to federal gift tax .
Federal gift tax generally applies if you give someone more than the annual gift tax exclusion amount, currently $15,000, during the tax year. That means you can give up to $15,000 each year, to as many individuals as you like, federal gift tax free.
In addition, you’re allowed an “applicable exclusion amount” that effectively exempts around $11,580,000 in 2020 for total lifetime gifts and bequests made at death.
Note: State tax treatment may differ from federal tax treatment, so look to the laws of your state to find out how your state will treat a 529 plan gift.
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Packaging A 529 Plan Gift
529 plan gifts are essentially a gift of cash, whichlets be honestisnt the most exciting thing to open. You can dress up your contribution by:
- Choosing 529 plan printable gift certificates. Some vendors offer the gift-giver the ability to create downloadable or electronic gift certificates to acknowledge the contribution. This is a common 529 plan feature.
- Buying physical gift cards. GiftOfCollege.com offers physical gift cards that can be ordered online or bought in person at over 3,000 retail locations.
- Adding a toy. Send or deliver a printable gift certificate or gift card along with a small age-appropriate gift, but dont feel the need to spend more than about $20.
Taxable Portion Of A Distribution
The part of a distribution representing the amount paid or contributed to a qualified tuition program doesnt have to be included as income. This is a return of the investment in the plan.
The designated Beneficiary generally doesnt have to include in income any earnings distributed from a qualified tuition program if the total distribution is less than or equal to adjusted qualified education expenses.
To determine if your total distributions for the year are greater or less than the amount of qualified education expenses, you must compare the total of all qualified tuition program distributions for the tax year to the adjusted qualified education expenses. Adjusted qualified education expenses are the total qualified education expenses reduced by any tax-free educational assistance. Tax-free educational assistance includes: the tax-free part of scholarships and fellowship grants veterans educational assistance the tax-free part of Pell grants employer-provided educational assistance and any other non-taxable payments received as educational assistance.
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Who Can Open An Account
Any U.S. resident can open a New Yorks 529 College Savings Account. You do not have to be a New York state tax payer or resident.
Moreover, you do not need any knowledge of mutual funds. Vanguard Inc. and Ascensus Broker Dealer offer several easy-to-digest investment options for you to choose from. The age-based investment path is one that stands out, but you do not have to choose it if you dont want to.
Withdrawals Are Only For Qualified Higher Education Expenses
What counts as qualified higher education expenses goes beyond tuition. It includes any mandatory fees, room and board , textbooks, computers and more. You can check with your grandchilds financial aid office to find out what specifically qualifies.
Although the funds in a 529 account are meant for your grandchild, you retain control over them. You can withdraw money from the account at any time. But doing so could hurt. Any withdrawn earnings on your investments used for nonqualified expenses are subject to a 10% tax penalty on top of ordinary income taxes. You wont owe income taxes on withdrawals of your contributions, but the IRS may require you to pay back any previously claimed tax deductions.
A common exception is if your grandchild receives a scholarship. You can withdraw funds equal to the scholarship amount awarded for a nonqualified expense and avoid the 10% penalty. The earnings portion of the withdrawal, however, are still also subject to ordinary income taxes.
If your grandchild receives a full-ride scholarship or decides to take a different path, you can still preserve your savings. They can be used for graduate school, or you may change the beneficiary to anyone in your grandchilds immediate family.
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Ways To Make A Gift To A 529 Plan Account
As a gift giver, you can open a new 529 plan account for your intended recipient or contribute to their existing account. A grandparent, for example, could open and contribute to a 529 plan account themselves or contribute to a parent-owned 529 plan account. The owner of the account can be anyone in relation to the beneficiary of the account, from a parent or grandparent to a stranger. An adult-aged student could even have their own 529 plan. The owner decides how the funds will be used for the benefit of the beneficiary.
The Free Application for Federal Student Aid determines eligibility for a student to receive financial aid. If a grandparent contributes to a grandparent-owned 529 plan, the asset is not included in the calculation of the childâs or parentâs assets on the FAFSA. However, the funds taken out of the 529 and used for tuition are considered to be a gift to the college-bound student and must be reported as the studentâs untaxed income on the FAFSA. Half of a studentâs untaxed income is considered to be available for paying college expenses.
The FAFSA Simplification Act of 2020 will change FAFSA rules to the benefit of grandparents as of the 2024-2025 school year . Under the new rules, grandparent-owned 529 plans will still not be listed as an asset on the FAFSA. However, there will be an additional benefit, as distributions from the grandparent-owned 529 plan will no longer be counted in a studentâs untaxed income.
Unintended Gift Taxes And The Gst
Rollovers and beneficiary changes can have unintended gift tax consequences to a 529 beneficiary even though he or she doesnt have control over the account. For example, if the new beneficiary is one generation below the old beneficiary , the transaction is treated as a taxable gift made by the old beneficiary to the new. In other words, the child would be deemed to have made a gift to the grandchild. Generation-skipping rules apply when the new beneficiary is two or more generations below the old beneficiary . If rollovers or beneficiary changes result in a taxable gift, the old beneficiary has the option to make the five-year election.
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Quantifying The 529 Tax Break
529 plans are relatively young, however, and both the costs to the federal government and the benefits to affluent families are likely to rise, assuming no change in policy. To estimate distributional impacts, we estimate the value of the federal subsidy for married parents with two children on different rungs of the income ladders. Specifically, we look at families living at the:
Family at 100 percent of federal poverty line
In 2016, the federal poverty line for a family of four was $24,300 a year.6 Among the very small proportion of such families saving into 529 plans, the typical amount is just $495 a year, according to a survey conducted by Sallie Mae.7 Although in practice savings tend to increase with the childs age, we assume a consistent annual contribution throughout the childhood of the beneficiaries. We also assume the investments are in a stock portfolio, with an annual return of 6 percent, a reasonable rate according to Vanguard data.8
Family making national median income
The just upper-middle class family
The rich super-saver family
Gifting Can Help With Estate Planning
Gifts to 529 accounts can also help with estate planning. Gifters can contribute up to $15,000 to a 529 account per person, per year with no gift tax ramifications. So a married couple could gift up to $30,000 per year without having to pay a gift tax or erode their lifetime gift tax exclusion. Once the annual gift has been made to the 529 plan, the money is no longer considered part of the gifter’s estate, for estate tax purposes.
The good news for people who receive gifts: When someone makes a gift to your 529 account, you generally will not owe taxes on the amounts.
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Enjoy A Federal Gift Tax Incentive
You can contribute up to $15,000 per year without triggering federal gift taxes. Or you can choose a special election that allows you to treat a single $75,000 contribution as if it were made over a five-year period.***
Gifts in excess of these amounts may be subject to federal gift taxes. For more information, consult a qualified tax advisor.
Plan Benefits: They Grow Tax
Earnings on 529 accounts are not treated as taxable income. Lets say, for example, that you save $1,000 in a 529 investment account, which grows by 5% in a year to $1,050. That $50 in growth isnt taxable.
Plus, if you sold those 529 account investments to pay for your childs college, you wouldnt face federal income tax on the sale proceeds or account withdrawals as long as you use those funds to pay for qualified education-related expenses. But if you use 529 funds for nonqualified expenses, the earnings could be taxed as income. Other penalties might apply too.
The rules for spending 529 funds allow you to use the money for everything from tuition to paying for a students internet access. The Secure Act, which became law in 2019, further relaxed rules on how you use money in a 529 plan. It allows beneficiaries of 529 funds to use leftover money to repay up to $10,000 of their student loans. The law also lets borrowers apply money from their 529 plan to pay for home schooling expenses and apprenticeships as well as private primary and secondary education.
No matter the expenses that the 529 money goes toward, growing college funds in a 529 savings account without adding to your tax burden is a significant tax benefit.
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Is It A Good Idea To Get A New York States 529 Plan
What we have done here is give you a general overview of how the New York 529 deduction scheme works. As youve seen, if youre a New York resident , opening this account could be a great idea. More so since it doesnt interfere with financial aid scholarship funds.
But if youre a resident of another state, it might be best to open an in-state 529 account to claim tax deductions.
Either way, you should consult your tax advisor for personalized guidance on what tax breaks you may be subject to. They will be able to answer all your questions and better help you make the right decision for you.
How Much Can You Contribute
You can deposit however little or much you want, as there are no contribution requirements. As long as the account balance does not exceed $520,000, all contributions are welcomed.
However, you should consult your tax advisor to learn of any possible gift tax your contributions may be subject to if you donate high amounts in a year.
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Put Time On Your Side With Accelerated Gifting
In general, you can contribute up to $15,000 per beneficiary per year without triggering federal gift taxes. However, special 529 rules allow you to use five years of annual exclusions at once for a tax-free gift of up to $75,000 .1 Your $1 million dollar gift tax exemption may also be available for funding your 529 account. Talk to your tax professional for additional details regarding this exemption.
Your Legacy: The Gift Of Success
529 plans are particularly popular with grandparents who wish to invest in a grandchilds future because they offer significant estate planning benefits in combination powerful savings features. Funding a 529 account is considered a completed gift to the beneficiary for estate tax purposes all contributions and earnings grow outside your taxable estate. Plus, unlike other gifting programs, a 529 plan enables you to retain control over the account and its assets.
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Small Amounts Can Add Up
The great thing is that gifts to your 529 dont have to cost a lot of money. Theres no minimum and every dollar helps. If 5 friends give $20 each for the first 10 birthdays of your child’s life, that adds up to $100 a year. It’s $1,000 over the course of a decadeplus any potential compounding investment returns that come with it.
If your 529 account is with Fidelity, you can create and share a link to your childs personalized gift page with family and friends. From there, they can easily gift money online using an electronic check if they want to contribute. You can edit your gift page and track the gifts you’ve received from your private dashboard.
As the account owner, only you can access your dashboard, so your account information is kept private.
Consider this hypothetical illustration showing the power of gifting over time.
Gifts can supercharge your college savings
Local and state taxes, inflation, fees, and/or expenses were not taken into account. If they had been deducted, performance would have been lower. The hypothetical is not intended to predict or project the investment performance of any security.Past performance is no guarantee of future results. Your performance will vary and you may have a gain or a loss when you sell your units.
Determine Your Risk Tolerance
For more information about the Oklahoma 529 College Savings Plan, call 1-877-654-7284 or see the Plan Description, which includes investment objectives, risks, charges, expenses, and other important information. Read and consider it carefully before investing.
Please Note: Before you invest, consider whether your or the beneficiarys home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in that states qualified tuition program. You should also consult your legal or tax professional for tax advice based on your own circumstances. Investments in the plan are neither insured nor guaranteed and there is the risk of investment loss.
If the funds arent used for qualified higher education expenses, a 10% penalty tax on earnings may apply.
The Oklahoma 529 College Savings Plan is offered by the State of Oklahoma. TIAA-CREF Tuition Financing, Inc. , program manager. TIAA-CREF Individual & Institutional Services, LLC, Member FINRA, distributor and underwriter for OCSP.
The Plan Web site contains links to other Web sites. Neither the Plan nor TFI and its affiliates are responsible for the content of those other Web sites. The accuracy of information on those sites cannot be confirmed.
All social media platforms are managed by the State of Oklahoma.
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Post Codes Or Profile Links To Social Media
Write a Facebook or Instagram post with a cute picture that details your childs career and education goals with a link to their 529 plan or gifting page along with the electronic code. This is a less personal approach to providing gift ideas, but it may be an ideal way to communicate to friends and family who havent yet started holiday or birthday shopping.
What About Gifts From A Grandparent
Grandparents need to keep the federal generation-skipping transfer tax in mind when contributing to a grandchild’s 529 account. The GSTT is a tax on transfers made during your life and at your death to someone who is more than one generation below you, such as a grandchild. The GSTT is imposed in addition to federal gift and estate tax. Like the basic gift tax exclusion amount, though, there is a GSTT exemption . No GSTT will be due until you’ve used up your GSTT exemption, and no gift tax will be due until you’ve used up your applicable exclusion amount.
If you contribute no more than $15,000 to your grandchild’s 529 account during the tax year , there will be no federal tax consequences your gift qualifies for the annual federal gift tax exclusion, and it is also excluded for purposes of the GSTT.
If you contribute more than $15,000, you can elect to treat your contribution as if made evenly over a five-year period . Only the portion that causes a federal gift tax will also result in a GSTT.
Note: Contributions to a 529 account may affect your eligibility for Medicaid. Contact an experienced elder law attorney for more information.
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