Friday 20 April, 2018
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5 Benefits of 529 Plans

BY KRISTEN MOON*

May 29 is National 529 College Savings Plan Day.

Will you get the day off from work?

Nope, sorry.

But, it is a good time for a refresher on why you need to open a 529 Plan right now.

If you already have one, good job. You’re already ahead of the game. Studies show that up to 80% of Americans are unsure what a 529 Plan is.

529 Plans come with many perks. Perks that can save you big. Perks that will allow you to keep more of your hard-earned money.

Let’s start with the basics. What exactly is a 529 Plan?

In a nutshell, a 529 Plan is an education tuition plan that is both tax-free on savings and investments. Unlike other savings vehicles, hello Roth IRA, 529 Plans do not have income limitations for contributors.

Below I have highlight five perks of a 529 Plan.

1. Tax Benefits

529 Plan contributions can provide that much-needed credit come tax time. InGeorgia, joint filers can deduct $4,000 and single-filers can deduct $2,000 when calculating taxable income. Since each state has their own 529 Plan, the deduction amount varies state-to-state.

2. Financial Aid Savings

An even larger benefit can be seen when it comes time for parents to fill out the dreaded financial aid forms for college. Knowing that all those 529 Plan contributions will help you keep more money in your pocket, might lessen the pain.

Let me explain.

The FAFSA and CSS Profile are both used to award financial aid to students. Each has their own formula. The one thing they have in common is that they both take a close look at your assets.

The important thing to know is that parent and student assets carry a different weight.  A heavier weight is placed on student assets.

So what can you do?

No bank accounts, stocks, or assets should be in a student’s name. 529 Plans are the one exception to this rule. Parent or student owned 529 accounts are weighted the same in these calculations.

Want to know just how much more weight is applied to student-owned assets?

FAFSA

Families are expected to contribute 20% of all assets owned by dependent students to help pay for college. This number drops to approximately 5% when the asset is owned by the parent.

CSS Profile

The Profile expects an even large contribution by students.

Student contributes 25% vs. Parent at 5%.

Ok, let’s use some real numbers now.

Student Asset:

If a student has $20,000 dollars in their bank account, CSS Profile will expect them to contribute $5,000 (25%) towards the Expected Family Contribution (EFC).

Parent Asset:

If the parents have the same $20,000 in their bank account, CSS Profile will expect them to contribute only $1,000 (5%) towards the Expected Family Contribution (EFC).

Big difference right!

So, do you see what I am getting at here?

Stash that birthday money from grandma in your 529 Plan!

529 Plans are an excellent way to save money for college without being penalized by the financial aid calculations.

3. Worry-free

The question I frequently receive is: What if my child decides not to go to college?

The good news is that the beneficiary on the account can be changed. The money can be transferred to a sibling. Also, if a parent decides to return to school, they can also use the money. The one criteria is that the money must be used for a qualified educational expense.

4. Options, Options, and more Options

Investment Options:

529 Plan funds are professionally managed by fund managers. Each state selects their fund manager. Therefore, fund managers will vary state-by-state. Account owners can choose from 3 to over 30 mutual fund-type investments. The account owner selects their level of risk and they are matched with a mutual fund that fits the bill. Most states have age-based funds which will allocate your fund according to when the beneficiary is expected to enter college. No investing experience is required.

Auto-Investments:

 Account owners can set up automatic investments so they don’t have to worry about managing the account month-to-month.

Multiple Gifts | Multiple Beneficiaries:

You may own and fund unlimited 529 accounts for unlimited beneficiaries. Other individuals can contribute to your 529 accounts.

5. Estate Planning

Grandparents can benefit with 529 Plans in 2 ways:

A tax-free gift to grandkids:

  • Account owners can contribute up to $14,000 ($28,000 for joint taxpayers) per beneficiary per year without triggering federal gift taxes.
  • Account owners are allowed to use five years of annual exclusions at once for a tax-free gift of up to $70,000 ($140,000 for joint taxpayers).

Control remains with the account owner:

  • A 529 Plan enables grandparents to retain control over the account, the investments, and assets.
  • The account owner remains in control of the funds, regardless of the age of the beneficiary. It’s your money! You can control how it is spent.

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*About the author:

Kristen Moon is an independent college counselor and founder of MoonPrep.com. She specializes in Ivy League, BS/MD Programs, Gap Year, and International Students.

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