Opportunities for 529 College Savings Plans
Categories
529 College Savings Plans consistently offer long-term tax-deferred growth for future students. As a savings tool, 529 plans come with a few restrictions. For one, contributions must be made with after-tax dollars. (Some state-level deductions might be available. North Carolina’s contribution deduction expired in 2013.) These limits do not entirely cancel out the benefits, such as tax-free distributions for eligible expenses and flexible beneficiary designations.
The average college savings balance maintained by parents for their children dropped over the past year by approximately $3,400. Although the Great Recession has passed and several indicators show the economic climate is less uncertain, contributions to college savings are a lesser priority. A few opportunities could change how parents save:
- Pending legislation. In late April 2015, a tax bill passed to the Senate Finance Committee. If H.R. 529/S. 335 passes, 529 College Savings Plans would offer several additional tax benefits, including recognizing the purchases of a computer and Internet service used primarily by the student as eligible expenses. The bill would also make college refunds penalty-free when contributed back into a plan should the student withdraw from school.
- Contribution limit flexibility. Although contributions to 529 plans are subject to gift tax if over $14,000 annually, these savings tools allow the tax advantage of a larger contribution to count over a 5-year window.
- Savings alternatives. 529 plans are only the second most popular tool parents use to contribute to their children’s future education. General savings accounts remain the choice of the majority, which means most taxpayers are missing out on the benefits of a college savings plan. Taxpayers with gross incomes less than $110,000 ($220,000 for joint filers) have the option to create a Coverdell Education Savings Account. Coverdell ESAs have stricter limits—only $2,000 may be contributed annually. Aside from these options, parents might consider setting up an incentive trust with specific provisions preventing distributions should the beneficiary fail to maintain enrollment in a higher education program.
Covering the full cost of a college education is not generally achieved through the use of a single 529 College Savings Plan. A combination of tools, proper tax planning, and a realistic forecast of future expenses can help structure assets effectively.
