529 savings plans offer a compelling means of tax-advantaged savings – but are they right for you? Named after a section of the U.S. tax code, 529 plans allow you to save money before it is taxed, with earnings that are also free from taxes.
What’s the catch? The money you save must be used to pay for qualified educational expenses, which include tuition and room and board at an accredited educational institution (and supplies and approved equipment the student needs in order to study at the college).
That may be compelling, given that the average annual cost of college tuition, fees, and room and board for the 2017-2018 school year was $20,770 for a four-year in-state public college and $46,950 for a four-year private college, according to the College Board Advocacy and Policy Center.
Typically, a parent or grandparent will open a 529 account and name a child or grandchild as the beneficiary. Unlike a custodial account, which eventually transfers ownership to the child, a 529 plan gives the account owner (not the child) control.
The IRS doesn’t specify annual contribution limits to 529 plans, but the annual gift-tax exclusion applies. In 2018, up to $15,000 gifted per person qualifies for the tax exclusion. So if you and your spouse have two grandchildren, you can gift a total of $60,000 without tax consequences.
If this piques your interest in 529 plans, ask a financial professional about these options. He or she can guide you through your state-specific 529 plans and help you set up a winning strategy to cover future education costs.