529 Plans: A Promise for a Bright Future

Authored by Lisa G. Kewley, Senior Trust Advisor.

As the tuition due date for fall semester is nearing, consider the benefits of investing in 529 plans early and to the maximum amount possible.

Significant Advantages

• Tax Treatment: Earnings grow federal and state income tax-deferred, and withdrawals are tax-free at both levels when used for qualified higher education expenses.
• Qualified Expenses: Tuition, certain room and board costs, computers and related technology expenses, books, fees, and equipment are all qualified expenses.
• Eligible Educational Institutions: Accredited universities, colleges, technical colleges, or professional schools nationwide and many abroad are also eligible.

Great Flexibility

• The contributor does not need to be the account owner and contributions can be made on behalf of a child, grandchild, niece, nephew, friend, yourself – anyone who is expected to attend an eligible educational institution.
• The designated beneficiary can be changed to another member of the family without tax consequences if for any reason the original beneficiary does not use the funds in the account.
• The maximum account balance in Wisconsin is $440,300 (effective January 2016), defined as the sum of all Wisconsin plan accounts for the same beneficiary.

Amazing Estate Planning

• The annual gift tax exclusion allowance can be used to contribute to a student’s 529 plan.
• Contributions made to a 529 plan are generally considered a completed gift and are removed from the estate for federal estate tax purposes.
• There is no federal gift tax on contributions made up to $14,000 per year for a single filer, or $28,000 for a married couple (amounts reflect 2016 tax year).
• Using a 5-year period election, a lump sum gift can be made of $70,000 (single filer) or $140,000 (married joint filers) by pro-rating the gift over 5 years with the federal gift tax exclusion. (NOTE: No additional gifts can be made to this beneficiary for 5 years without incurring a gift tax. If the donor was to die during the 5-year period, then a prorated portion of the contribution would be “recaptured” into the estate for estate tax purposes, however the 529 account can keep the actual proceeds).

A tax advisor should be consulted so your individual circumstances are considered if you want to maximize the benefits of 529 plan contributions.

As a wealth transfer strategy, a generous gift made to a loved one’s 529 plan helps light the path towards a bright future.