How to Use 529 Plans for Education in Your Estate Plan

Families are seeking ways to save for college because the cost of higher education is rising each year. One option is a 529 plan. These investment plans allow families to put money away for a child’s future education expenses and gain tax benefits. While you may discuss your options with a financial advisor, an estate planning attorney can explain how a 529 plan can be part of your estate planning goals or how to contribute to a grandchild’s account

What Are 529 Plans?

A 529 plan is a tax-advantaged savings plan designed specifically for education expenses. They are also referred to as qualified tuition plans and Section 529 plans. Even though these plans are named for Section 529 of the federal tax code, they are administered by the states and the District of Columbia.

A range of investment options are available for 529 plans. The funds in the plans can be used to pay for qualified education expenses, including tuition, fees, room and board, and required books and supplies. The funds can be used at participating accredited colleges, universities, and vocational schools in the United States and even some institutions abroad.

There are two types of 529 plans: education savings and prepaid tuition. Education savings plans work like a typical investment account, allowing families to invest their contributions in mutual funds, exchange-traded funds (ETFs), or other types of investments.

Prepaid tuition plans allow families to purchase credits or units at today’s prices, which can then be used to pay for future college tuition and fees at participating colleges and universities.

How Do 529 Plans Work?

When you contribute to a 529 plan, your money is invested and can grow tax-free as long as it’s used for qualified education expenses. Additionally, many states offer tax deductions or credits for contributions to their state-sponsored 529 plans. Withdrawals from the account for non-qualified expenses may be subject to taxes and a 10% penalty.

One of the biggest benefits of 529 plans is their flexibility. There are no income limits for contributions, and anyone can contribute to the account, including grandparents, aunts, uncles, and family friends. Additionally, the account owner can change the account beneficiary at any time, so if one child decides not to go to college, the funds can be used for another child’s education expenses.

Why Choose a 529 Plan?

There are many reasons why a 529 plan may be a good option for your family’s college savings. Some reasons include:

• Tax Benefits: Contributions to a 529 plan grow tax-free and can be withdrawn tax-free when used for qualified education expenses. Additionally, some states offer tax deductions or credits for contributions to their state-sponsored plans.
• Flexibility: There are no income limits for contributions to a 529 plan, and anyone can contribute to the account. Additionally, the account owner can change the account beneficiary at any time.
• High Contribution Limits: Most 529 plans have high contribution limits, allowing families to save significant amounts of money for education expenses.
• Control: With a 529 plan, the account owner maintains control over the funds and how they are invested.
• Transferability: If one child decides not to go to college, the funds can be used for another child’s education expenses.
• Minimal Effect on Financial Aid: When it comes to financial aid, 529 plans are treated as an asset of the account owner, which has a relatively minimal effect on the student’s eligibility for need-based financial aid.

When Should You Start a 529 Plan?

As with all long-term investment or savings strategies, the earlier you start, the better. Talk with your financial advisor and estate planning attorney to learn about the options available and your goals for the future. Contact us today to schedule an appointment to discuss saving for a child or contributing to your grandchild’s education.

This article offers a summary of aspects of estate planning. It is not legal advice and does not create an attorney-client relationship. For assistance, please contact our Forty Fort office or call (570) 288-1800.