529 Plan: Saving for Education Expenses

By Modern Wealth Management

July 15, 2019

Using a 529 Plan to Save for Your Children’s and Grandchildren’s Education Expenses

For a little more than two decades, people with ambitions of paying for their loved one’s college education have been able to set aside money into tax-favored accounts. The amount of money saved into the accounts was generally tax deductible on the state level. However, there are some states that do not allow tax deductions, but for our readers in Kansas and Missouri, your states do allow deductions.

Benefits of a 529 Plan

Better yet, when the funds were withdrawn to be used towards qualified education expenses, such as tuition, textbooks, and in some cases room and board, there was no income tax due. In other words, you put money into the account, and sometimes received a state tax deduction, the money grows tax-free, and could be withdrawn in the future without a tax liability, provided the expenses were “qualified.” In 2017, the Tax Cuts and Jobs Act expanded the use of 529 plans to include K-12 public, private, and religious tuition.

Some might have concerns about socking away potentially thousands of dollars into a 529 plan to pay for higher education, only to have the beneficiary of the account choose to not attend college. Good news is the IRS allows you to transfer the beneficiary of the account without penalty. If, however, you decide to cash out the account, the IRS will levy a 10% penalty, on top of taxing the earnings on your contributions at your ordinary income tax rate.

Kansas & Missouri Income Tax Deductions

While there is no federal income tax deduction given for contributions, you may receive a state income tax deduction. For single filers in Kansas, the state will allow you to deduct up to $3,000 per year per beneficiary and $6,000 per year per beneficiary for joint filers. In Missouri, the state will allow deductions up to $8,000 per year for single filers, and $16,000 per year for joint filers.

For those of you who feel like you’re behind on making contributions to a 529 plan, and want to make large contributions, you should be aware that there may be gift-tax consequences. The IRS allows for gifts to be made from each taxpayer in the amount of $15,000 in 2019. However, they also allow for a 5-year gift tax averaging. This means that a person can gift a total of $75,000, and a couple can give $150,000, effectively making five years’ worth of gifts in one year. In this example, the couple would not be eligible to make another gift until this 5-year period is over.

529 Plan Resources

529 plans will vary from state-to-state. Plans may have certain minimum account sizes, and the investment options and tax benefits will vary. There are tools and websites dedicated to helping you find the best 529 plan for your family. You can also work with a qualified financial planner and tax accountant to make the selection. In many cases, a 529 plan can be a great way of saving and paying for future education costs for your children or grandchildren.

If you have questions about saving for your child or grandchild’s education using a 529 plan we’re happy to talk! Call 913-393-1000 or schedule a complimentary consultation below. We’re always ready to discuss your retirement plan and saving for the life you want to live.

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.