What Is a 529 Plan and Why Are They Even More Attractive!

You might be wondering, what exactly is a “529 College Plan”?  This is a state run program that is named after the Internal Revenue Code 529, that was introduced in the Tax Payer Relief Act of 1997.  This plan was intended to allow parents to invest for their children’s future educational needs, free from state and federal income taxes.  In addition, there are several states that also allow the payments into the plan to be deducted on their state income taxes, providing an even bigger benefit!  For more information on which states this applies to, visit https://www.blackrock.com/investing/literature/brochure/529-plans-and-state-tax-benefits-client-piece-en-us.pdf.

The original version of this plan was limited to the use of funds for college and university tuition and expenses.  States saw this as an opportunity to assist families with long-term investing and promote the advancement of education for their citizens.  Mr. and Mrs. Smith could invest a monthly amount for their children.  The proceeds would grow tax free and when Billy and Bobby matriculate to college, there will be money available for their educational needs.

The current passage of the Tax Cuts and Jobs Act has changed the law so that parents can now use the tax-free funds in these accounts for private/religious elementary and high school tuition and expenses!  Now, Mr. and Mrs. Smith can use those funds (tax free) to pay for Billy and Bobby to go to private/religious school.

For states that allow a tax deduction, this essentially provides a pass-through vehicle to allow the parents to pay for private/religious tuition and expenses somewhat tax free.  In addition, to the use of tax free funds for the tuition and expenses for Billy and Bobby to go to private/religious school, Mr. and Mrs. Smith can also take a deduction for the amount invested on their state income tax return (they live in one of the states that allow the deduction).

There are two groups that will greatly benefit from this change:

  1. Those that have already started investing in a 529 Plan and send their children to private/religious elementary and high school.  Those funds can now be used to pay for the tuition and other educational expenses.  This will also reduce the funds in the plan and assist when applying for college financial aid.
  2. Parents that live in one of the states that offer a deduction on their state income taxes. Money can be put into a 529 Plan and then directly taken out to pay for elementary and high school expenses, as well as taking the deduction on state taxes.

There are a few additional provisions you need to be aware of.  The funds in the plan must be used ONLY for tuition and other educational expenses, to remain tax free.  If these funds are used for any other purpose, state and federal taxes will be assessed as well as a 10% federal penalty.  Additional information can be found at, https://www.sec.gov/reportspubs/investor-publications/investorpubsintro529htm.html

Contact an investment professional to assess your personal situation.  You can contact Excerebus at info@excerebus.com or 407-988-5647 for a list of investment advisors we work with.

Categories: Life Discussion

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