We often are asked by parents (or grandparents) of young children about college savings plans. 529 college savings plans offer tax-advantaged ways to save for the various costs of higher education. While these plans have a lot of name recognition, many people still have questions about the details. Since it is the first day of school for most kids here in Virginia, it seemed an appropriate time for us to share these eight things you should know about 529 college savings plans:
- Earnings on 529s are tax-free, as are withdrawals, as long as you use the money for qualified educational expenses. Qualified expenses include tuition and fees, books, room and board, supplies, and even computer-related expenses.
- There are no income restrictions to open and contribute to a 529 account. Even high-income earners can open and fund college savings plans.
- The money in a 529 account can be used towards in-state or out-of-state schools, both public and private.
- The contribution amounts are very high: you can contribute up to $350,000 per beneficiary into a 529 account. (Keep in mind that you will need to get a little deeper into gift tax rules if you intend to contribute more than $14,000 to a 529 account in any one calendar year. You can do it, but you should know the rules first.)
- The beneficiary is portable. If your child decides they want to do something else instead of going to college, you can name someone else the beneficiary (sibling, first cousin, grandparent, aunt, uncle, or yourself). You do not need to decide on a new beneficiary the moment that your child decides not to go to college. For instance, you could hold onto it and eventually name your grandchildren the beneficiaries.
- Charitable family members can contribute to an existing 529 account that you own or set up their own 529 and name your child as beneficiary.
- In Virginia, putting money into a 529 plan has the added bonus of providing a state tax deduction for contributions up to $4,000. Thirty-three other states also offer state tax deductions for contributing to a 529.
- If your child gets a scholarship, you will not lose the money. You can use the plan to cover expenses that the scholarship does not, such as books, room and board, or other supplies. You can keep the plan open in case your child goes on to graduate school. You can change the beneficiary and name another college-bound relative. A final option would be to simply cash out the plan. Doing so would subject you to income tax and a 10% penalty on the earnings. If you were feeling generous, you could name your child the owner and let them cash it out at their (presumably) lower tax rate.
If you have questions, or are interested in finding out how to start a 529 plan, please let us know!