529 savings plans are a common choice for college savings, but they have another use that’s typically overlooked: estate planning.
529 plans have tax-deferred contributions, tax-free withdrawals (for qualified expenses,) and their contributions can be deducted from your taxable income. These features, plus the ability to change beneficiaries at any time, make 529 plans one of the smartest college savings vehicles out there.
But if you’re going to use a 529 plan to save for your child’s education, you might want to hang onto the account even after your child has graduated. Here’s why:
The Long-Term Gifting Strategy
There are many ways to reduce the size of your estate for a lighter tax burden, but funding a 529 plan is one of the most unique. You can change the beneficiary whenever you’d like, to any other member of the family.
That means that you can continuously fund a 529 plan for your children’s, grandchildren’s and great-granchildren’s education, and continue to receive the tax benefits along the way.
Each year, you can contribute up to the annual gift tax limit – which is $15,000 – to each 529 plan you’ve opened. However, there is a loophole that allows each account owner to pay up to five years’ contributions in advance without incurring gift taxes. That means that a married couple could contribute up to $150,000 for each account, all at once.
Using these features, your 529 plans can double as family education funds and effective estate planning tools. As long as the laws don’t change, you aren’t limited to how many accounts you can open, or how long you can keep them for.
These features may become even more important if the White House increases taxes for government programs. One proposal is that the estate tax exclusion could be lowered from $11.7 million per person to $5 million or less. If that happens, many families will need to find ways to reduce their estates, and 529 plans are a legitimate way to achieve that.
Why 529 Plans are More Versatile than You Might Think
Some people hesitate to put money into 529 plans because they’re concerned about versatility.
What if the child decides not to go to college later? How limiting is a 529 plan in terms of expenses?
The good news is that a 529 plan can be used in more ways than you might think. Here are some of the qualified expenses that a 529 plan can cover:
- Up to $10,000 of elementary, middle or high school tuition
- College tuition, fees, books, supplies and equipment
- Qualified room and board fees, which may include food and dining plans
- Tuition fees
- Computers, software and required equipment
- Special needs expenses
If a child decides not to go to college, 529 plans may also be used to cover trade and vocational education. But if they skip higher education altogether, you can change the beneficiary on the account, or you can pull out the money as cash.
Note that the cash option does incur fees, including federal income taxes and a 10% penalty on the earnings.
More About 529 Plans
Here are some additional 529 plan resources that can help you with your college or estate planning:
Do you need help planning for your financial future? Contact me today to set up a meeting to talk about your goals.