Saving for Education Expenses? Consider a 529 Plan
For many parents, saving money for your children’s education is something you may worry about. We want to help alleviate that worry by providing some basic information to help you make more informed choices. One of the better-known savings options is to set up a 529 Plan.
What is a 529 Plan
A 529 Plan is a tax-favored education savings plan sponsored by the state or a state agency. 529 Plans are flexible. You can purchase the plan from any state and use the funds to pay for college costs at any qualified college nationwide. For example, you can live in Alabama, invest in a plan from Vermont, and use it for schooling in Florida.
Alabama’s 529 Plan is called CollegeCounts and you can read more about it by clicking here.
Flexibility & Restrictions
The great thing about a 529 Plan is that its flexibility extends beyond just your choice of where to invest. Contributions to the plan typically have extremely high limits. And anyone can contribute to the plan. This means you, your spouse, the child’s grandparents, aunts, uncles – whoever – can contribute and you likely still won’t reach the maximum contribution limit. Additionally, if you set up a 529 Plan for a child who decides NOT to go to college, you can change the beneficiary without incurring a penalty.
However, 529 Plans restrict what you can use the funds for when your child withdraws them. Typically, school supplies, tuition and books are covered. But you’ll need to read up on whether your plan is eligible for things like room and board. Secondly, with changes in the new tax law, the funds in a 529 Plan can now be used to pay for K-12 expenses. Currently, however, Alabama hasn’t caught up. So, if you use these funds for K-12 expenses, you won’t have to pay Federal tax on the earnings, but you will have to pay Alabama tax.
Taxes & 529s
Your contributions to a 529 Plan are non-deductible and are treated as gifts, which are subject to the annual gift tax exclusion (in 2019 $15,000 for an individual or $30,000 for married couples electing to split their gifts). Earnings are tax free and when your child takes the money out for qualified education expenses, the earnings are excluded from income!
A 529 Plan is a flexible option if you want to set aside funds for education. If you are interested in this or any other kind of financial planning, hb&k has experts who can help you prepare for a sound financial future. Contact us today to set up a meeting!