These 529 plans generally is a versatile asset switch device, advisors say
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The benefits of 529 plans
While there’s no federal deduction for contributions, 529 plans have some incredible tax benefits, said Mari Adam, a Boca Raton, Fla.-Based CFP and senior wealth advisor at Mercer Advisors.
Families can use 529 plans to invest and grow tax-free money on approved educational expenses, including college or trade school tuition.
You can also spend up to $ 10,000 per year on elementary, middle, or high school education, and there is a lifetime grant of $ 10,000 on student loans.
Depending on the plan, there may also be tax breaks at the state level.
If the child doesn’t need the funds for education, families can switch beneficiaries to another generation of the same generation, Herzberg said.
For example, the new recipient of the 529 plan could be a sibling, niece, or nephew.
In the worst case, someone could overfund the plan and use the money on unqualified expenses. If so, they may owe income tax on account growth plus a 10% penalty.
Depending on the plan, a state fee may also apply.
Even so, the money has grown tax-deductible for years, “which is a pretty big deal,” said Adam.
Families can reduce tax bills if their child subtracts the money and reports the income and penalty on their own tax return, she said.
Of course, this assumes that your child is in a lower income tax bracket.
“There are hardly any downsides,” she added.
Transfer fortunes with 529 plans
With higher taxes looming, some families may be anxious to move their wealth to younger generations.
Grandparents can use a 529 plan for their grandchildren and potentially generations after that, Herzberg said. But there is a problem: gift taxes.
Wealthy donors often worry about gift taxes, a levy on certain remittances that exceed $ 15,000 per recipient per year. If they give away more than their lifetime limit, they owe gift taxes on the transfer.
However, there is an exception for 529 plans, Herzberg said.
Donors can deposit $ 15,000 as an advance for five years by adding $ 75,000 at the same time, and they can double their transfer to $ 150,000 if their spouse agrees to give the same gift.
Donors can use this strategy for multiple recipients without the risk of gift taxes.
“This is a great way to get grandparents to give gifts to younger generations and transfer their wealth in a really important way,” said Adam.
And unlike some other estate planning tools, donors can withdraw the money when needed, Herzberg said.
These perks could allow families to reduce their possessions while paying for education for generations to come, he said.
“It belongs in the pocket of every professional advisor,” said Herzberg.