Doing just fine with a 529
August already? How does this happen?! You’ve likely already seen the big box stores lining their shelves with back-to-school supplies. Never fear… there is still some summer left to enjoy, but diligent planning never rests.
Quite often, our team is asked about 529 plans. If you’re not familiar, they offer tax deferred growth and tax free distributions for qualifying expenses. Formerly, they could only be used as college savings vehicles however; with the newer tax laws, 529 plans can now also be used for private high school and private elementary school costs too! Hot dog! That’s a tax savvy idea I can get behind.
Seeing as how this year has seemingly entered warp speed, we can understand how time flies. Not all parents thought to establish a 529 plan on the exact day their child entered the world. It’s okay! There’s still tax planning fun to be had. Some states (like Illinois, our hub) provide a deduction for contributions to their 529 Plan.
The federal level is where the big tax party happens, but we don’t get many late planning perks from them. However, for residents of high tax states – we’ll take any break we can get! There is a cap, and it’s not a dollar for dollar deduction; so you will need to take the time to review the specific terms of your state with tax qualified professionals. In Illinois, you can receive a $1,000 deduction for $20,000 in 529 Plan Contributions. Here’s the beauty: the funds can be deposited, parked in a fund for about a week, and then withdrawn to pay eligible expenses.
Here’s an example: You’re an Illinois resident. You receive the tuition bill for little Susie. The due date is month-end. You place the entire year’s tuition into an Illinois 529 Plan. Then, a few days later direct the 529 plan to pay the college tuition (or reimburse you for the expense if you pay it directly.) BOOM. $1,000 deduction for state taxes.
Here’s what NOT to do: Don’t overfund your 529 plan. If you end up with more dollars in the plan than eligible expenses, you run the risk of withdrawing for non-qualified expenses at which point the growth is taxed and penalized at 10%.
What if the 529 plan is overfunded? You can consider changing beneficiaries. The new beneficiary must be a family member of the original beneficiary. You can go decently far on the family tree, but the qualified family member list stops after the 1st cousin of the original beneficiary.
What if little Susie gets a scholarship? That’s great! You must submit the receipt of scholarship funds by 12/31 of the current year in order to get the funds out of the 529 penalty free. There are still taxes on the growth, though.
Investors should consider, before investing, whether the investor's or the designated beneficiary's home state offers any tax or other benefits that are only available for investment in such state's 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. This and other information about 529 plans is available in the issuer's official statement and should be read carefully before investing. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan.