Have you ever heard of a 529 plan? If not, don’t worry, you aren’t alone. However, if you intend to include education planning for your children or grandchildren as a part of your estate plan, you may want to learn more about them.
The 529 Plan Explained
Simply put, a 529 plan is an account that is used to save for a child’s educational expenses. The plans were named for the Internal Revenue Code’s Section 529, which was added in 1996. It provides a tax-free status for all “qualified tuition programs.” The very first 529 plan was created as a prepaid tuition plan for students.
A prepaid tuition plan is one of the two types of 529 plans. The other option is an investment savings plan. There are many states that actually sponsor 529 plans and in some cases you may not even have to be a resident of the state to participate in it.
The Income Tax Benefits Offered by 529 Plans
Contributions made to a 529 plan are not deductible on your federal taxes. However, any income earned by the 529 investment account is not taxable as long as it remains in the 529 account or as long as the money is used for a qualified education expense.
To put this more simply, the earnings on the investments in a 529 account are never taxed if they are used for a qualifying purpose. This means your child(ren) or grandchild(ren) (or any other designated beneficiary) has the ability to pay for their educational expenses using money you have earned tax-free.
What are Qualified Education Benefits?
Qualified education benefits include things like tuition to college or tuition for an elementary or secondary religious, public, or private school. Some of the other qualified education benefits a 529 plan can be used to pay for include:
- Any fees from the educational institution
- Computer technology and other related equipment or services
- Room and board at any educational institution
Estate Planning Benefits of 529 Plans
Planning for your child’s or grandchild’s education may also provide some benefits to you. If you need to reduce the value of your estate for estate tax purposes, you can make annual gifts up to $15,000 to each 529 plan without tax consequences. And unlike an irrevocable trust, you will still have control over 529 plan assets.
Getting Help with a 529 Plan
If you would like more information about setting up a 529 plan for your child or grandchild, contact an experienced estate planning attorney like The KC Estate Planner, LLC, today.