A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.May 29, 2018
Money from a 529 account can be used for major post-secondary education costs such as: Required tuition, fees, books, supplies and equipment. … Expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in a registered and certified apprenticeship program.
Anyone can contribute to a 529 plan account and name anyone as a beneficiary. Parents, grandparents, aunts, uncles, stepparents, spouses, and friends are all allowed to contribute on behalf of a beneficiary.
What about groceries? Yes, you can use 529 plan money to pay for off campus food. As long as the student is enrolled at least half time, the IRS will approve room and board expenses for off-campus housing.
Yes, grandparents can claim the deduction for contributing to a 529 if they live in one of the 34 states that offer a state income tax deduction for 529 college-savings plan contributions. The only question is whether you must own the account or whether you can contribute to one set up by, say, the child’s parents.
A gift contribution to a 529 plan is a deposit made by anyone but the account holder. If an aunt, uncle, grandparent or other family member makes a deposit, they are all considered gifts.
In either case, parents receive the same treatment as any other person making a contribution: each parent can give up to $15,000 annually to their child’s 529 plan without having to file a gift tax return, for a total of $30,000 per year.
Regardless of your age, you can set up a Section 529 plan for yourself to fund educational expenses now or in the future. You can use the money in a 529 plan to upgrade your skills by just taking a few classes at a qualified college or trade school, or working towards a degree or advanced certificate.
How Grandparent 529 Plans Affect Financial Aid. Overall, 529 plans have a minimal effect on financial aid. But, the FAFSA treats parent-owned accounts more favorably. For example, you report 529 plans assets as parent assets, which can only reduce aid eligibility by a maximum 5.64% of the account value.
529 plans typically offer you unsurpassed tax breaks. Earnings in a 529 plan grow tax-free and are not taxed when they’re withdrawn. This means that however much your money grows in a 529, you’ll never have to pay taxes on it. However, you do not get to deduct your contributions on your federal income tax return.
Saving in a 529 plan has more growth potential in the long run than saving in a regular bank savings account. According to Bankrate, the national average saving account interest rate is 0.07 % as of March 31, 2021.
You don’t lose unused money in a 529 plan. The money can still be used for post-secondary education, for another beneficiary who is a qualified family member such as younger siblings, nieces, nephews, or grandchildren, or even for yourself.
The IRS counts tuition, fees and other expenses that are required to enroll in or attend college as qualified education expenses. That means things like rent, groceries and other living expenses don’t count.
Room and board includes the cost of housing and the cost of a meal plan. Colleges typically have a room and board budgets for students who live on campus in college owned or operated housing, for students who live off-campus in an apartment and for students who live off campus with their parents or other relatives.
You don’t need to provide the 529 plan with evidence that you will be using the money for eligible expenses, but you do need to keep the receipts, canceled checks and other paperwork in your tax records (see When to Toss Tax Records for more information), in case the IRS later asks for evidence that the money was used …
Mortgage Payments Do Not Qualify as Room and Board
Even if the student were to buy the home, they still can’t use 529 plan money to make the mortgage payments. A mortgage payment is a payment on a loan and not a payment of housing costs. As such, it is not a qualified higher education expense.
Funds from 529 plans can be used for qualified K-12 tuition expenses, in addition to their traditional role in paying for college expenses.
Grandparents can also elect to write a check directly to their grandchild’s college or university to cover tuition–and as long as the check is paid directly to the school, no gift tax will be incurred.
1. 529 plans offer unsurpassed income tax breaks. Although contributions are not deductible, earnings in a 529 plan grow federal tax-free and will not be taxed when the money is taken out to pay for college. … This has been a huge incentive for Americans to save for college.
Any person can give any other individual up to $15,000 in 2021 without paying a gift tax. There is, however, an exception to this gift tax specifically for 529 plan contributions, which allows individuals to front-load a plan for up to five years at one time without having to pay the tax.
All 529 plans accept third-party contributions, regardless of who owns the account. That means anyone, including grandparents, aunts, uncles or even friends can help a child save for college. You do not have to be a family member of the beneficiary to contribute to their 529 plan.
California does not allow families to deduct their contributions to qualifying 529 plans. … Delaware’s tax code does not allow families to deduct 529 contributions.
If you want to pay tuition directly to the college your niece or nephew attends you may do so without incurring a gift tax penalty, since the federal government does not recognize paying another person’s tuition as a gift. State gift taxes may still apply.
Families should be aware of possible gift tax consequences when it comes to funding a 529 account. In 2021, a single person can give up to $15,000 per person, per beneficiary to a 529, equating to $30,000 for a married couple.
Annual 529 plan contribution limits
Excess contributions above $15,000 must be reported on IRS Form 709 and will count against the taxpayer’s lifetime estate and gift tax exemption amount ($11.58 million in 2020).
In 2021, individuals can contribute up to $15,000 per beneficiary ($30,000 for gifts from a married couple) without using up part of their lifetime gift tax exemption or having to pay gift taxes.
Yes, but the unborn child cannot be the beneficiary of the account. The IRS requires that a 529 account be opened for a living beneficiary who has a Social Security Number. However, 529 plans offer the flexibility to later change the beneficiary. …
|Two ways to contribute to a 529|
|Scenario #1||Scenario #2|
|Year 1||Up to $75,000||Up to $15,000|
|Year 2||Year two||Up to $15,000|
|Year 3||Year three||Up to $15,000|