It's as Simple as 5-2-9!

/ Worley Erhart-Graves Financial Advisors/

Like IRAs and Roths, 529 plans are savings plans.  Unlike IRAs, though, which are meant to help investors prepare for retirement, 529 plans are intended to help families set aside funds for future college costs. However, 529s are unlike IRAs in different ways as well – they have: 

  • No income limits

  • No age limits

  • No annual contribution limits. (You can't contribute more than what education expenses might reasonably be, which differs by state. But there is a "superfund" option, where 'five-years' worth of contributions at a time option. 

Just about everyone is eligible to take advantage of 529 plans, named after Section 529 of the Internal Revenue Code (which created these types of savings plans in 1996).

At Worley Erhart-Graves Financial Advisors, we consider 529 plans, legally named “Qualified Tuition Programs”, to be particularly valuable financial planning and investment tools. Why do we feel that way? Well for one thing, 529 plans offer unusually generous federal income tax breaks, including:  

  • Earnings in a 529 plan grow federal tax-free (we need to remind readers the contributions are not tax-deductible).

  • Earnings is a 529 plan will not be taxed when the money is taken out to pay for qualified education expenses.

Our own state of Indiana offers tax breaks for 529 plans as well. In fact, Indiana is one of just a few states that offers a tax credit instead of a tax deduction for contributions to its Section 529 plan. The current tax credit offered is 20% of the amount contributed up to $5,000.

A key element of 529 plans is the fact that donors (typically the parents or grandparents) stay in control of the 529 account. (This differs from UGMA/UTMA custodial accounts, where the child takes control of the assets once he or she reaches legal age). The owner also has the right to change the beneficiary.

Who has access to the money and when? A 529 account owner can withdraw funds at any time and for any reason. The caution is that, if the money is being withdrawn for other than college-related expenses, the earnings portion of the assets will incur income tax and an additional 10% penalty tax.

Even another tax planning “goodie” associated with 529s is that deposits up to $14,000 per individual per year will qualify for the annual gift tax exclusion. 

Saving for college can be as easy as 5 – 2 – 9!

Content was prepared by a freelance journalist on behalf of Worley Erhart-Graves Financial Advisors