Back-To-School: The Perfect Time for a 529
At Pence Financial Group, we believe one of the best investments you’ll ever make is in yourself. Education opens doors, creates opportunities, and builds a foundation for lifelong success. Whether you’re saving for a child’s future, investing in your own career, or helping a loved one pursue higher education, planning ahead can make those goals more achievable. That’s why we’re passionate about helping families understand the tools available, like 529 education savings plans, that can turn today’s savings into tomorrow’s opportunities.
What is a 529?
A 529 is an education savings plan that was established by Congress in 1996. It allows contributions to grow 100% federal and state, tax-deferred, and may be withdrawn tax-free if multiple, specific provisions are met. 529 plans have many investment options, depending on the plan provider. The three most common are age-based portfolios, which gradually shift the risk level as the beneficiary ages, static portfolios, which have a fixed risk level that can be manually adjusted as needed, and individual portfolios, which allow the account owner to pick specific investment options.
What Are the Tax Benefits?
Many states offer a tax benefit to the account owner for contributions up to a certain amount. Check with your state’s specific plan rules to find out if you qualify.
Who Can Contribute?
529 plans offer a great way for friends and family to give a long-lasting, meaningful gift to the beneficiary. Most 529 plans offer a shareable gifting link, making it quick and easy to gift funds. Often, people will contribute for birthdays, holidays, and other important life events such as kindergarten or high school graduation.
What Can It Be Used For?
529 plans allow for many qualified withdrawal options. Higher education withdrawals do not have a limit if the funds are used for educational purposes, including room and board, tuition, fees, and supplies. They can also be used for trade and vocational programs, widely expanding the beneficiary’s options for education outside of higher education. A lifetime limit of up to $10,000 can be applied to federal or private student loans. Additionally, it can be used for k-12 education expenses up to $20,000 per calendar year. The ability to use the funds for k-12 education has opened a pass-through loophole. You can now fund the plan and then use those funds to pay for immediate educational expenses. If your state offers tax benefits on contributions, this can allow the account owner some additional tax savings.
What Happens If You Don’t Use All Your 529 Funds?
529 plans are versatile when it comes to unused funds. Let’s look at a couple of the most popular options.
- Change the Beneficiary if the original beneficiary no longer needs the funds. You can transfer the unused amount to another family member. For example, if you fund a 529 plan for your child and they do not use all the funds, the funds could transfer to future grandchildren, essentially jumpstarting their 529 before they are even born.
- Rollover to a Roth IRA. Up to $35,000 unused funds can be transferred into the beneficiary’s Roth IRA. Transfers must be made yearly up to the IRS contribution limits.
- Take a non-qualified withdrawal. Funds can be withdrawn for non-education purposes. However, the earnings may be subject to applicable federal and state income taxes, as well as a 10% penalty.
If you’re ready to start planning for your child’s, grandchild’s, or even your own educational goals, we’re here to help. Visit us at Pence Financial Group, and let’s create a 529 savings strategy that fits your family’s needs and long-term financial goals. Contact our team today to get started! We look forward to helping you invest in what matters most: education and your future.
Disclosure
Prior to investing in a 529 Plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits, such as financial aid, scholarship funds, and protection from creditors, that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
LPL Financial and Pence Financial Group do not offer tax advice or services.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Please consult a qualified professional regarding your specific situation.
