529 Savings Plans are tax-privileged education savings and one of the most popular ways to save for college today. They can also be used to save for K-12 lessons. Much like how 401 (k) plans changed the world of retirement planning a few decades ago, 529 savings plans changed the world of educational savings.
Here in Colorado, lawmakers passed a law in 2019 to create Child Starter Accounts (CSA) that allow every child born or adopted in Colorado to receive a $ 100 contribution to their CollegeInvest 529 college savings account. Starter accounts for children came into effect on January 1, 2020. Parents just need to open a 529 savings account with CollegeInvest (no loss of money required) to get started.
CUSO Financial Services, LP (“CFS”) * financial advisors at Elevations Credit Union can work with you to ensure you understand your options to save for education. For more information and considerations on 529 plans, see below
Tax benefits and more
529 savings plans offer a unique combination of features that no other educational savings vehicle can offer:
- Federal tax advantages: Contributions to a 529 account accumulate deferred taxes and income is tax-free if the money is used to pay the beneficiary’s qualifying education costs. (The earnings portion of a payout that is not used for qualifying education expenses is taxed at the recipient’s tax rate and penalized with a 10% penalty.)
- State tax benefits: States are free to offer citizens their own tax benefits, such as a tax deduction for contributions. Colorado annual gift tax exclusion contributions of $ 15,000 ($ 30,000 for couples) per beneficiary.
- High contribution limits: The maximum contribution level in Colorado is $ 400,000 per beneficiary. This is the sum of all accounts assigned to this beneficiary.
- Unlimited participation: Anyone can open a 529 savings plan account regardless of income level.
- Broad use of funds: The money in a savings plan for 529 can be used to pay full expenses (tuition, room, board, books) at any college or graduate school in the United States or abroad that is accredited by the Department of Education and for K-12 Tuition up to $ 10,000 per year.
- Professional money management: 529 Savings plans are offered by states but are administered by specific financial firms that are responsible for the plan’s underlying investment portfolios.
- Flexibility: Federal regulations give you the right to convert the beneficiary of your account to a qualified family member at any time and transfer the funds in your account to another 529 plan once per calendar year with no impact on income tax or penalty.
- Accelerated gift giving: 529 savings plans offer an estate planning benefit in the form of an expedited gift. This can be a cheap way for grandparents to help educate their grandchildren while reducing their own estate, or for parents to contribute a large lump sum. Special rules that apply to 529 plans only allow a flat gift equal to five times the annual gift tax exclusion amount ($ 15,000 in 2021) in a single year. This means that individuals can give up to five years’ worth of a lump sum gift of $ 75,000, and married couples can give up to $ 150,000. No gift tax is owed if the gift is treated as given in equal installments over a period of five years and no further gifts are made to that beneficiary during the five years.
- Transfer to the ABLE account: 529 account holders can transfer (transfer) money from a 529 account to an ABLE account without any tax consequences for the federal government. An ABLE account is a tax-privileged account with which people who become blind or disabled before the age of 26 can save disability-related expenses.
Choosing a 529 savings plan **
Although 529 savings plans are a creation of federal law, their implementation is left to the federal states. There are currently over 50 different savings plans available as many states offer more than one plan.
You can join any state’s 529 savings plan, but this variant can create confusion when it comes to choosing a plan. Each plan has its own rules and restrictions that can change at any time. To make the process easier, there are a few important features to consider:
- State tax benefits: A majority of states offer 529 members of the savings plan some form of income tax break, such as a deduction for contributions or tax-free income from qualified withdrawals. Colorado taxpayers can deduct every dollar that contributed to a $ 529 savings plan.
- Investment options: 529 savings plans differ in the investment options they offer. Ideally, you want to find a plan with a variety of investment options, ranging from conservative to growth-oriented, and matching your risk tolerance. Most plans offer age-based portfolios that automatically adjust to more conservative stocks as your child approaches college age. (Remember, however, that every investment involves risk, and past performance is no guarantee of how an investment will perform in the future. The investments you choose may lose money or do not perform well enough to leave college – Cover costs as expected.)
- Fees and costs: Fees and costs can vary widely between plans, and high fees can put more of a strain on your savings. Typical fees are annual maintenance fees, administration and management fees (usually referred to as an “expense ratio”) and underlying fund expenses.
- Reputation of the financial institution: Make sure the financial institution managing the plan is reputable and that you can reach customer service if you have any questions.
- User experience: Is the plan’s website easy to use? Can you easily do routine tasks online, such as B. set up automatic monthly contributions, change your contribution amount, research planned investments, determine your return or request a payment?
- Contact a professional: With so many plans available, it can be helpful to consult a seasoned finance professional who can help you choose a plan and choose your plan investments. In fact, 529 savings plans are only sold by the advisor, which means you need to see a specific financial advisor to open an account.
Once you’ve chosen a plan, it’s time to open an account. You will need to complete an application designating a beneficiary and selecting one or more of the plan’s investment portfolios to which your contributions will be allocated. Also, you will typically need to make a minimum initial contribution, which must be made in cash or as a cash alternative.
After that, most plans allow you to contribute as many times as you want. This gives you the flexibility to adjust the frequency of your contributions to suit your own needs and budget, and to invest your contributions systematically with automatic monthly transfers from your bank account.
In the event of investment changes, please note that according to federal law, you may only exchange your existing planned investments for new investments twice a year. In other words, if your existing plan funds are currently invested in Plan Portfolios A and B, but you want to change them to Plan Portfolios C and D, you can only do this twice per calendar year. However, you usually have unlimited say in the investment of your future contributions.
You can also convert the beneficiary of your 529 savings account into a qualified family member with no income tax or penalty impact.
529 Prepaid Study Plans – A Distant Cousin
There are actually two types of 529 plans – savings plans and prepaid study plans. The tax benefits are the same, but the account features are very different. A prepaid curriculum allows you to prepay tuition fees at participating colleges, usually state public colleges, at today’s rates for future use by the beneficiary. 529 prepaid curricula are generally restricted to citizens, while 529 savings plans are open to citizens of any state. Prepaid curricula are far less common than 529 savings plans.
Call us at 303-443-4672 x2240 to schedule a no-obligation appointment with one of our CFS * financial advisors at Elevations Credit Union so we can discuss this very important topic!
** There are fees associated with 529 savings plans. Investments in 529 involve investment risks. You should consider your financial needs, goals, and risk tolerance before investing. For more information on 529 plans, please refer to the issuer’s official statement or plan disclosure document, which should be read carefully before investing. Most of the 529 plans are state sponsored and administered. State tax breaks vary between states, and some offer residents additional tax breaks when they invest in their own state plan. Contact a qualified tax advisor for more information.
Created by Broadridge Investor Communication Solutions, Inc. Copyright 2016.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to a person’s personal circumstances. As far as this material is concerned with tax matters, it is not intended or written to be used by any taxpayer and cannot be used to avoid penalties that may be imposed by law. Every taxpayer should seek independent advice from a tax advisor based on his or her individual circumstances. These materials are provided for general information and educational purposes and are based on publicly available information from sources believed to be reliable. We cannot guarantee the accuracy or completeness of these materials. The information in these materials is subject to change at any time without notice.