An Overview of 529 College Plans

When you are contemplating your legacy, you will ask yourself how you can have a positive impact on your loved ones that persists after you are gone. If you have youngsters on your inheritance list, you can potentially give them the gift of a college education.

Giving someone the ability to reach their full potential is a very meaningful act. The benefits begin when the young student recognizes the fact that college is in their future. During the preparatory years, they will always have their eye on the prize, and this is a supreme motivator.

529 Savings Plans

One option is through a 529 savings plan.  The structure is similar to a Roth individual retirement account. You make contributions into the plan with after-tax earnings, and the interest accumulates tax-free over the years.

When the beneficiary is ready to go to college, the money in the account can be used to pay for books, fees, tuition, housing, and food, and the distributions are not taxed.

In addition to the standard 529 plan, there are also prepaid tuition plans.

With the latter option, you can purchase college credits at in-state public universities. The credits can be used to pay for all approved college related expenses. You are locked in at the current price point, so you get maximum value for your investment dollar.

Generally, in order to participate in the prepaid tuition plan, you have to contribute into a plan that is offered by the public university network in your state of residence.  In Oklahoma and Kansas (and most other states), you can deduct the contributions on state tax returns, but there are certain prescribed limits.  However, you cannot deduct the contributions from your federal income taxes.

The beneficiary of a 529 account can be changed, so if the first beneficiary does not use all the funds in the account, the designation can be changed to provide funding for another family member.

Another major advantage is the fact that you can withdraw money from the account for any reason if it becomes necessary. You would have to pay a 10 percent penalty and distributions of the earnings that have accumulated would be subject to taxation.

Traditionally, money in these accounts can only be used to pay for college, but this changed when the Tax Cuts and Jobs Act was passed in December of 2017. Now, up to $10,000 per year can be withdrawn to pay for qualified K-12 expenses.

Estate Tax Efficiency

Most people do not have to pay the federal estate tax because there is a high credit or exclusion that can be used to transfer a certain amount tax-free. This year, the exclusion is $11.58 million, and the top rate of the tax is 40 percent.

The exclusion that we have right now is at a record high, and it is scheduled to expire or sunset at the end of 2025. At that time, it will revert back to $5 million adjusted for inflation if there are no new tax laws passed in the meantime.

There is also a federal gift tax that is unified with the estate tax, so the aforementioned exclusion applies to large lifetime gifts along with your estate.

However, there is an additional $15,000 per person, per year gift tax exclusion. You can give this much to any number of people in a calendar year free of taxation before you would start to use some of your unified exclusion.

If you have estate tax concerns, a 529 savings plan can help you mitigate your exposure. You can use this $15,000 annual exclusion to fund accounts for multiple different family members.

These accounts have relatively high contribution limits that top out at $500,000, allowing you to move a good bit of money out of your taxable estate if necessary.

Schedule a Consultation!

Today is the day for action if you have been thinking about putting an estate plan in place. You can set up an appointment with our attorney in Oklahoma City if you call us at 405-843-6100.

The number in Overland Park, Kansas is 913-385-9400, and you fill out our contact form if you would like to send us a message.