As spring blooms and graduation looms, many families find themselves confronting the reality of college expenses. Families with established 529 Plans for their children are prepared for this transition. As the time emerges to withdraw these funds, Freestone’s Wealth Planning team prepared this guide to provide recommendations on appropriate usage of 529s. It is important to note which types of education expenses may be qualified vs. non-qualified to simplify this process and avoid tax penalties.
529 Plans offer tailored tax advantages and strategic features designed to empower families as they navigate educational expenses. 529s traditionally have provided tax-free growth and withdrawals when funds are used for qualified post-secondary education expenses, although their uses have expanded in recent years. Understanding the nuances of these savings vehicles is essential for families seeking to make informed decisions regarding their children’s educational futures.
Qualified vs. Non-Qualified Expenses
| Type of Expense | Is it a Qualified Education Expense? |
| Tuition and fees | Yes, up to the full amount of college or vocational school tuition and required fees. Limited to $10,000 per year or K-12. |
| Books and supplies | For college expenses only |
| Computer, software, and internet access | For college expenses only |
| Room and board | For college expenses only, if the student is enrolled at least half-time |
| Special needs equipment | For college expenses only |
| Transportation and travel costs | No, costs associated with transportation to and from campus, such as airfare and gas, are not qualified education expenses |
| Health insurance | No, even health insurance policies offered by a school are not considered qualified expenses |
| College application and testing fees | No |
| Extracurricular activity fees | No |
| Student loans | Yes, with a lifetime limit of $10,000 |
Looking Ahead
Now that we’ve explored how families of high school graduates can maximize their existing 529 Plans, let’s shift our focus to those with young children who are eager to learn about the potential benefits and strategies of setting up their own 529s to proactively save for future educational expenses.
Key Benefits of 529 Plans:
Tailored Tax Advantages: 529 Plans provide unique tax benefits, including tax-deferred growth and tax-free withdrawals for qualified educational expenses We believe this tax-efficient structure not only maximizes your savings potential but also offers peace of mind knowing that your investments are working in your favor.
Contributions: Anyone can contribute to a 529 account, and all contributions are considered gifts for tax purposes. Individuals can contribute up to $18,000 per person in 2024 without triggering any gift tax. 529 Plans also allow for a “super funding” option, meaning that an individual may contribute up to five years of annual exclusion gifts in one year without incurring gift tax or utilizing their lifetime gift exemption. In 2024, this means that an individual could contribute up to $90,000, and couples can contribute up to $180,000 if they elect to gift split.
When super funding a 529, it’s important to note that the total gift is assumed to be evenly split across the five-year period, and no additional contributions can be made by the super funders during that five-year period, unless the annual gift exclusion increases, or the contributor elects to utilize some of their lifetime gift exemption.
Preparation for Diverse Educational Paths: Whether your child (or grandchild) is pursuing a traditional four-year degree, enrolling in vocational training, or exploring alternative educational pathways, 529 Plans offer the flexibility to adapt to their evolving needs. From tuition and textbooks to room and board, these plans accommodate a wide range of educational expenses.
Empowerment Through Control and Flexibility: As the account owner, you retain full control over the 529 Plan, dictating how the funds are allocated. This level of autonomy allows you to tailor your savings strategy to align with your child’s educational goals and aspirations, which may provide a sense of security and confidence in your financial planning efforts.
Actionable Steps That Can Maximize Your 529 Plan:
- Strategic Planning: Evaluate your savings goals and establish a realistic plan considering factors such as available cash flow, projected tuition costs, student living expenses, and potential financial aid. Setting clear objectives can guide your savings strategy and help you stay on track towards achieving your goals.
- Thorough Research: Work with your Client Advisor to explore the various 529 Plans available, considering factors such as investment options, fees, and state-specific benefits. We believe comparing different plans can enable you to identify the one that best suits your needs and preferences.
- Professional Guidance: Your Client Advisor can assist you with personalized insights and guidance, helping to compare the various 529 Plans available and navigate the complexities of 529 Plans. Freestone believes that by working with a professional and building your education savings goals into your financial plan, you can better align your savings strategy with your long-term objectives.
How Freestone Can Help
Your Freestone Client Advisor can run an analysis to estimate education costs for your children or grandchildren and can assist you in determining whether a 529 Plan is the right solution. We can then use this analysis to create a savings plan for you to be able to fully fund that expense and will monitor that plan to ensure you are on track to meet your goal.
Conclusion
In conclusion, we believe that financial planning is essential to easing the inevitable anxiety that arises as your child embarks on the exciting journey from high school to college. By leveraging the unique benefits of 529 Plans and adopting a proactive approach to saving, you can lay a solid foundation for your child’s future and navigate educational expenses with confidence. Start planning today and unlock the potential of education.
Disclosures: Nothing in this document is intended to provide, and you should not rely upon it for, accounting, legal, tax or investment advice or recommendations. We are not making any specific recommendations regarding any financial planning, estate planning, or tax planning strategy, and you should not make any financial planning, estate planning or tax planning decisions based on the information in this document. This document is provided for educational purpose, and it is intended only to discuss a few limited aspects of complex legislation or complex planning strategies. This document is not a comprehensive or complete summary of considerations regarding its subject matter. Each individual is in a different situation and has different issues to address, and the options in this document are not appropriate for everyone. Please consult your Freestone client advisor and a professional legal or tax advisor regarding options specific to your needs.