Investing in education and preserving wealth for future generations are two essential goals for many families – and they do not have to be mutually exclusive.
529 plans can be used as an effective strategy to fund your child’s education expenses while also reducing the value of your taxable estate.
Learn about the intricacies of 529 accounts and why you may want to consider them as part of your estate plan.
Understanding 529 Plans
Also known as qualified tuition programs, 529 plans are tax-advantaged savings accounts that can be used to pay educational expenses from kindergarten through graduate school. A parent or grandparent can create a 529 account as part of their estate plan to support their loved ones’ education while also enjoying certain tax benefits.
Funds in a 529 plan grow tax-free until they are taken out. If the funds are used for qualified education expenses such as tuition fees, books, and other supplies, they typically aren’t subject to federal and estate taxes. Beneficiaries typically don’t have to include their plan earnings as income. However, if the distribution exceeds your beneficiary’s expenses, a portion of the profits is taxable.1
Contributions to 529 plans are considered complete gifts, which means the funds and future earnings are excluded from your taxable estate.2 But unlike other estate planning tools like irrevocable trusts, you maintain ownership over the assets in your account. This means you can choose investments, change account beneficiaries, and control withdrawals.
Estate and Other Tax Benefits
You can establish 529 accounts in 50 states and the District of Columbia and contribute funds to help decrease the overall value of your taxable estate. However, additional tax benefits can vary significantly depending on where you live, your contribution level, and your income.
For example, Indiana, Minnesota, Oregon, Utah, and Vermont currently provide state income tax credits for contributions to 529 plans, while 30 states and the District of Columbia allow you to deduct 529 contributions from your taxable income.
Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, and Pennsylvania offer state tax parity, which means you can deduct your taxable income on contributions to 529 accounts in any state.2 This is important because most states only allow tax deductions for their state-sponsored plans.
Contributions to 529 plans can also qualify for the annual gift tax exclusion (up to $18,000 for individuals or $36,000 for married couples filing jointly).3
A unique benefit of investing in a 529 account is the option to “super-fund” it with a lump sum of up to 5 years’ worth of contributions ($90,000 for 2024) at once.4 As long as you don’t make additional contributions to the same beneficiary during this period, this lump sum will not be included against your lifetime gift exemption.
If you are a parent or grandparent living in one of the above states that offer additional tax benefits—or you’re concerned about exceeding your federal gift exclusion—consider embracing 529 accounts in your estate plan.
A Flexible Solution for Estate Planning & Retirement
Another advantage of using 529 accounts as an estate planning tool is their flexibility. If you want to set up plans for multiple children or grandchildren, you can do so—and anyone who contributes to them can potentially qualify for the gift tax exclusion.
Additionally, you are not required to change 529 plans to change beneficiaries—and you can transfer a plan to a child, sibling, parent, first cousin, and certain relatives by marriage.5
Starting in 2024, the Secure 2.0 Act allows people to transfer unused funds from a 529 plan into a Roth IRA without incurring additional taxes or penalties – turning education savings into retirement funds. This can be beneficial if your child no longer needs money for their education or if there are leftover funds in your account that you’d like to reinvest in a tax-advantaged account. However, there are some caveats6:
- The 529 account must have been active for at least 15 years
- The Roth IRA account beneficiary must be the same as the 529 account
- The money transferred into the Roth IRA must have been in the 529 account for at least five years
- There is a lifetime rollover cap of $35,000 for each beneficiary
- Roth IRA contributions are subject to annual limits
Invest Today in Your Family’s Tomorrow
A 529 plan may be a good fit if you want to invest in a loved one’s education, boost future retirement savings, and reduce the value of your taxable estate to benefit future generations.
The earlier you start contributing, the more time you have to take advantage of compound interest and potential growth.
Crescent Harbor can provide objective advice and work with your family’s attorney and tax specialist to determine whether 529 accounts align with your unique situation and estate planning goals.
Sources
1 https://www.irs.gov/taxtopics/tc313
3https://www.morningstar.com/personal-finance/how-do-your-states-529-tax-benefits-stack-up
4https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024
5 https://www.savingforcollege.com/article/how-much-can-you-contribute-to-a-529-plan
6 https://www.investopedia.com/terms/1/529plan.asp
7 https://www.savingforcollege.com/article/roll-over-529-plan-funds-to-a-roth-ira
This material is for informational purposes only and should not be construed as tax or legal advice.
Registered Representatives of Sanctuary Securities Inc. and Investment Advisor Representatives of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., an SEC Registered Investment Advisor. Crescent Harbor Private Wealth is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.