Current tax laws provide enhanced opportunities to save tax-efficiently for college and also tuition expenses at numerous private or parochial K-12 schools. Many family goals can be achieved by coordinating savings strategies across multiple generations.
Parents can help their children by starting 529 plans when their children are born so these tax-favored investment accounts have an opportunity to grow for nearly two decades. Time is your friend in investing! 529 plan contributions grow federally tax-free, and earnings are not subject to federal income tax when you take withdrawals for qualified education expenses. Additionally, if parents choose to utilize qualified home state 529 plans, they may also receive some state income tax deductions or credits. State income tax benefits should not be the only consideration when choosing a 529 plan. Attributes such as fees and performance should be considered. In some cases, stronger investment performance (and possibly lower fees) can outweigh the benefits of a state income tax deduction.
Grandparents may wish to make an investment in the educational futures of their grandchildren. 529s offer unique estate planning benefits since there are opportunities for accelerated gifting and contributions are considered completed gifts and investment gains may be removed from an estate. Account owners maintain control over the account, including the ability to use the money for purposes other than college should the need arise (The earnings portion of any nonqualified withdrawal is subject to federal income taxes, applicable state income tax and an additional 10% federal tax penalty). This flexibility can be helpful for grandparents with numerous grandchildren and varying levels of financial need for education.
Families will occasionally experience lower than expected educational expenses due to scholarships, grants, unexpected inheritances, joining the U.S. military, following a different path than college, etc. Families with excess 529 funds may wish to consider:
Changing beneficiaries to a qualifying family member of the original beneficiaries
Use funds for student loan repayments (there is an aggregate lifetime limit of $10,000 per plan beneficiary)
Qualified tuition program rollover to a Roth IRA. This is a new provision that went into effect in 2024 based on prior provisions established under SECURE 2.0 Act. See IRS website for further guidance: https://www.irs.gov/publications/p590a#en_US_2023_publink100074297. This new provision is complex and should be reviewed with the family tax advisor.
These are just a few of the highlights of the tax-advantaged long-term opportunities for properly coordinated family 529 savings plans. Families should consult their personal tax advisors to ensure they receive maximum benefit from contributions and distributions for qualified education expenses. If you would like to learn more about these opportunities, please contact Garrett Hofer, our new Niantic Neighbors Expert Contributor. Garrett lives in East Lyme and has nearly 25 years of experience helping affluent families successfully plan for education and financial security.
Sources: https://www.irs.gov; Nuveen (Scholars Choice Education Savings Plan); www.savingforcollege.com; Janney “Planning Strategies for Remaining 529 Balances”
The concepts illustrated here have legal, accounting and tax implications. Neither Janney Montgomery Scott LLC nor its Financial Advisors give tax, legal, or accounting advice. Please consult with the appropriate professional for advice concerning your individual circumstances.
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