529 Plans – Does It Make Tax Sense to Contribute?
There have always been huge benefits to saving for higher education using 529 Plans. While the contributions are not deductible,
earnings in a 529 plan grow federal tax-free and will not be taxed when the money is withdrawn to pay for college. The donor stays
in control of the account. The named beneficiary has no legal rights to the funds. You can be assured that the funds will be used for
the intended purpose. This differs from custodial accounts where the child takes control of the assets once he or she reaches legal age.
Are there any state benefits?
Over 30 states currently offer a full or partial deduction or credit for 529 plan contributions. NJ does not offer any such deduction or credit. However, if you live or work in NY there is a deduction of $5,000 ($10,000 if you’re married filing joint) when you file your NY income taxes.
Are there income limitations?
Unlike Roth IRAs, 529 plans have no income limits, age limits or annual contribution limits. There are lifetime contribution limits per beneficiary depending on the state of approximately $250,000 to $400,000.
One can contribute up to $75,000 in one year per beneficiary and not be subject to a gift tax. Even if the contribution exceeds $75,000, no gift tax is paid until the donor has made lifetime gifts in excess of $10,000,000 (ten million dollars).
What if my child doesn’t use all the funds?
It’s not a “use it or lose it” account. 529 owners can change their beneficiaries at their own discretion and without limitation. For example, if one child doesn’t use all or any of the funds in the 529 plan, the account can be placed in the name of a sibling or other family member.
What’s New in 2018?
The new tax act allows qualified expenses under 529 plans of up to $10,000 per beneficiary per year to be used for elementary and secondary school expenses. These expenses include tuition at religious educational institutions.
And there’s more good news! Amounts from 529 plans may be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account, or member of the beneficiary’s family. ABLE (Achieving a Better Life Experience) is a tax-free savings account which meets the needs of individuals with disabilities. An individual’s ABLE account can have up to $100,000 which does not count toward the SSI resource limit.
Start Saving for Jr. Now!
529 plans were always attractive vehicles to save for higher education. The qualified expenses now expand to elementary and high school tuition. This opens planning opportunities for both low-income families, seeking to receive the earned income credit as well as for high-income families who want to reduce their taxable income.