With the costs of college on the overwhelming rise, many taxpayers are looking for a solution to challenge of saving enough money for their children’s futures. Countless individuals are looking to 529 plans for the answer to their ever-growing problem of affording an education for their children. Exploring the benefits of 529 plans can be a daunting task for many; however, the opinion shared by most financial professionals is that any college savings is better than nothing.
What is a 529 plan?
Created in 1996, 529 plans are educational savings plans operated by either the state or an educational institution. They can be used for reimbursement of expenses such as qualified tuition at elementary or secondary schools as well as post-secondary training and/or college tuition costs. Some plans also allow for withdrawals to help with costs of technology such as computer equipment.
How much can I contribute?
Contribution limits are set by the individual states. Typically, these plans have an aggregate limitation on overall contribution amounts ranging from $235,000 to $529,000. Individual states also usually place a limitation on the amount of the contribution that is deductible on the tax return. Also, remember that you are not bound to the plan offered by your state. If you live in Illinois, you can choose to contribute to a plan in California. However, you could forgo any tax credits you would receive should you choose an Illinois 529 plan. Seven parity states offer state income tax benefits for contributing to any 529 plan. If you live in Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, or Pennsylvania, your state will provide a tax credit with a contribution to any other state’s 529 plan.
What are the individual tax benefits for opening a 529 plan?
Currently, more than 30 states offer state income tax deductions for contributing to a 529 plan. Most have a limitation on the annual amount that is allowed to be considered for credit. For example, in Illinois, the deductible contribution amount is $10,000 per year ($20,000 for a married couple filing jointly). Each state has certain restrictions and benefits, so it is imperative to thoroughly evaluate each plan prior to choosing one that works best for you.
What are the employer tax benefits for matching a 529 plan?
Companies in Arkansas, Colorado, Illinois, Nebraska??, Nevada, Wisconsin, and Utah are eligible for income tax credits through the states for matching 529 plan contributions. With most ranging from 20%-25% tax credit, the benefits of matching 529 contributions could potentially provide a healthy credit on a business tax return. All states have a maximum credit per employee limitation ranging from $500-$1,960.
How are the earnings in the 529 plan taxed?
While contributions to a 529 plan cannot be made with pre-tax earnings, no matter what state you live in the earnings accumulated in a plan are tax-free. Withdrawals from the plan are also tax-free as long as the money is spent according to the limitations set forth by the federal government. The restrictions on what is considered as a “qualified expense” can appear to be rigid; however, tuition is considered a qualified expense for both college as well as grades K-12. The Tax Cuts and Jobs Act recently allowed the use of 529 funds for grades K-12 at $10,000 per qualifying student.
What do I do next?
It is important to not only look at the benefits of your individual state 529 plan, but to also consider the other plans available to you. An excellent resource to use when selecting a plan is available at this website https://www.savingforcollege.com/compare_529_plans/. Once you choose a plan that fits your needs, you will need to contact the individual state to begin the process of opening the new plan.
In order to choose the plan that will best suit your needs, you may want to seek a professional opinion. At AgriSolutions, LLC we offer consulting services by seasoned tax preparers and practitioners who can help you make the best decision for your family. Call today to schedule a consulting appointment.
Disclaimer – Descriptions provided in this article are presented as generalities. There are many factors not listed above which may impact your return. This article should not be considered legal or tax advice. For advice on a specific transaction, please contact the AgriSolutions Tax Department at firstname.lastname@example.org.