529 Plans: An Investment in Education and Legacy

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As college tuition continues to climb, 529 Plans can offer a strategic solution for parents and grandparents aiming to support the educational aspirations of their children and grandchildren. These plans may serve as valuable estate planning tools, offering educational funding that is both accessible and tax efficient.

Understanding 529 Plans

A 529 Plan is a tax-advantaged savings plan specifically designed to encourage saving for future education costs. Named after Section 529 of the Internal Revenue Code, these plans offer two primary types: Prepaid Tuition Plans and Education Savings Plans.

Prepaid Tuition Plans allow account holders to purchase credits at participating colleges and universities at current prices for future tuition and fees. This type of plan is beneficial in hedging against inflation in educational costs. Education Savings Plans, on the other hand, allow for investment in various assets, such as mutual funds and exchange-traded funds (ETFs).

These investments grow tax-free, and withdrawals are also tax-free when used for qualified education expenses, which now include K-12 tuition up to $10,000 per year, in addition to post-secondary education costs.

There are multiple advantages of a 529 Plan. Contributions to a 529 Plan grow tax-deferred, and withdrawals for qualified education expenses are free from federal income tax. Many states also offer tax deductions or credits for contributions to 529 Plans. The account holder retains control over the funds, including the flexibility to change the beneficiary to another family member if the original beneficiary chooses not to pursue higher education or receives a scholarship.

529 Plans and the Secure Act 2.0

Starting in 2024, unused funds in a 529 qualified tuition plan can now be distributed tax-free to a Roth IRA. The amount allowed depends on which is lower, either the normal Roth IRA limits (without income limits) or the total amount from the 529 accounts over the last five years plus any earned interest. The beneficiary must remain the same for at least 15 years and there is a lifetime limit of $35,000 per beneficiary. Click to learn more in our guide.

529 Plans as Estate Planning Tools

529 Plans are not just beneficial for immediate educational expenses; they also serve as effective estate planning tools. One of the unique features of these plans is their ability to accept large lump-sum contributions without incurring gift taxes. The IRS allows individuals to make five years' worth of gifts in a single year, up to $90,000 per donor ($180,000 for married couples) per beneficiary, as of 2024, without triggering gift taxes. This "superfunding" provision makes 529 Plans an attractive option for grandparents who wish to reduce their taxable estate while contributing significantly to their grandchildren's education.

By leveraging 529 Plans in estate planning, families may address how their wealth can benefit future generations in a meaningful way. Contributions to 529 Plans are considered completed gifts to the beneficiary, which removes the assets from the contributor's taxable estate. This strategy not only provides substantial tax benefits but also promotes a legacy of educational achievement and financial responsibility within the family.

Addressing Rising College Costs

The escalating cost of college education is a growing concern for many families. According to the College Board, the average annual cost of tuition and fees at a private four-year university was over $38,000 for the 2023-2024 academic year, with public in-state universities costing nearly $11,000. These figures do not account for additional expenses such as room and board, books, and supplies, which can significantly increase the overall financial burden.

A 529 Plan can work toward alleviating these concerns by allowing families to save and invest specifically for education expenses. The compound growth within a 529 Plan can result in substantial savings over time. For example, if a family starts saving $250 per month when their child is born, with an average annual return of 6%, they could accumulate over $100,000 by the time the child turns 18. This substantial sum can make a significant dent in college expenses, reducing the need for student loans and the associated debt burden.

Additionally, many 529 Plans offer age-based investment options that automatically adjust the asset allocation as the beneficiary approaches college age. These options typically become more conservative as the enrollment date nears, preserving the accumulated savings from market volatility.

Planning Matters

As a tax-advantaged savings vehicle, a 529 Plan not only helps offset the rising costs of college but also provides strategic advantages in estate planning. By investing in a 529 Plan, parents and grandparents can support their loved ones' educational goals, mitigate their taxable estate, and help foster a legacy of financial confidence and academic achievement.

Talk to a Financial Advisor

Financial advisors at BECU Investment Services can help provide guidance so you and your family can plan for a wealth transfer and feel prepared for the future. Our team will take the time to get to know you, understand your goals and wishes to help build a financial and retirement strategy that's appropriate for you. Set up a complimentary consultation or call 206-439-5720 today.

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