The holiday season is a time for joy and generosity. This year, consider giving the gift of education to your loved ones. In this blog, we’ll explore a couple of simple ways you can contribute to the educational journey of a child, grandchild, or other young loved one. We also will discuss the benefits of utilizing a common tool, a 529 plan.
529 Contributions: The Potential Tax Benefits
You may have heard of 529 plans. In simple terms, these are tax-advantaged savings plans designed to help save for future education costs. Earnings from contributed funds made to a 529 plan grow tax-free, and any withdrawals used for qualified education expenses are also tax-free. While there is no federal income tax deduction for the contributions, many states do offer a state income tax deduction.
A Collaborative Tool
Anyone can open and/or contribute to a 529 plan for the benefit of a loved one. This means that family members looking for gift ideas might want to consider contributing to a 529 plan, creating a collaborative effort to alleviate the burden of education expenses. Grandparents, aunts, uncles, and other family members can inquire with parents and guardians about their educational savings goals and how to best support those goals.
Estate Planning Benefits
Contributions to a 529 plan are considered completed gifts for tax purposes, making it an effective estate planning tool. The IRS allows annual tax-free gifts up to the annual exclusion amount, which can help reduce the size of your taxable estate.
Individuals can also take advantage of a special provision that allows them to contribute up to five times the annual gift tax exclusion amount in a single year without triggering gift tax consequences, provided no additional gifts are made to the same individual in the next four years. This has the added benefit of “super funding” the 529 plan.
Beyond the Dollars: The Gift of Knowledge
Beyond the financial gift of contributing toward educational costs, consider setting aside some quality time to engage in conversations about money matters. By sharing your own financial experiences, you can impart hard-earned lessons for better financial decision-making. Through age-appropriate discussions, you can provide young family members with a leg up on topics such as the importance of budgeting, saving, and financial responsibility. Utilize real-life examples to make concepts relatable, and perhaps even share anecdotes that highlight the consequences of both prudent and imprudent financial choices. Introducing simple concepts like the fundamentals of saving or the significance of delayed gratification can plant seeds of financial literacy that will benefit your loved ones for years to come. By gifting them with the knowledge to navigate the financial landscape, you empower them to make informed decisions and build a solid foundation for their financial futures.
Whether through contributing to a 529 plan or through sharing your financial knowledge, you can give the gift of education this year. By expanding beyond material gifts, your gifts this year can leave a lasting impact on the educational and financial futures of those you cherish most.
Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawal for eligible education expenses, such as tuition and room and board. However, if you withdraw money from a 529 plan and do not use it on eligible education expenses, you generally will be subject to income tax and an additional 10% federal tax penalty on earnings. 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. Investors should consider, before investing, whether the investors 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. The tax implications can vary significantly from state to state. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and you may incur a profit or loss regardless of the strategy selected, including diversification and asset allocation. Any opinions are those of the author and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. This material is being provided for information purposes only is not a complete description, nor is it a recommendation.
