A big concern for many of our estate planning clients is how they can help their loved ones save for their college educations. While there are many ways one can accomplish this goal, §529 savings plans offer a tax advantaged way to pay for college tuition that saving up money in a normal bank account does not. If you are considering ways to help your loved ones prepare for future education expenses, a Warren, MI estate planning lawyer can help you understand the planning options available to your family.
A §529 plan is a specific kind of tax-advantaged investment account designed to be used for the beneficiary’s qualified educational expenses. The beneficiary of the account can be anyone from children, to grandchildren, or even the person setting up the account. The money invested in the §529 plan continues to accumulate money without being taxed while the funds are in the §529 plan.
Once withdrawn the funds withdrawn are not taxed so long as they are withdrawn for qualified higher education expenses. Qualified higher education expenses include:
- Tuition,
- Fees assessed by the institution, such as enrollment fees,
- Certain room and board expenses,
- Meal plans,
- Books, and
- Supplies and equipment required for the enrollment and attendance at the institution.
When used primarily by the beneficiary in connection with their education, computers, and related costs, such as internet access fees and printers, are also considered qualified higher education expenses. However, it is important to note there are also expenses that are considered non-qualified and therefore subject to taxes if §529 plan funds are withdrawn and used for them such as travel expenses, sports and activity related fees, and health and medical expenses of the student.
The person contributing the money to the §529 plan can also contribute up to $95,000 per year, or $190,000 per year for married couples, without using any lifetime gift-tax exclusion, as long as no further annual exclusion gifts and/or generation-skipping transfers to the same beneficiary are made over the five-year period contributions are made to the §529 plan and if the person contributing reports the transfers as a series of five equal annual transfers on Form 709 when filing their tax returns. The State of Michigan also allows individuals and married couples to take annual income tax deductions on contributions to §529 plans in the amount of $5,000.00 and $10,000.00, respectively.
Money can be withdrawn from §529 plans at any time, for any reason. However, if the money withdrawn is not used for qualified education expenses, federal income taxes may be assessed on any earnings withdrawn, as well as 10% penalty. However, these taxes and penalties will not be assessed in certain circumstances such as the death of the beneficiary, the beneficiary receiving qualifying tax-exempt college scholarships covering their expenses, or the beneficiary enrolling in a branch of the United States Military.
Clearly, §529 plans can be a great, tax-advantaged way to save for you or a loved one’s post-high school education. If you have questions about §529 plans, call our office today. The benefits of a §529 plan can literally be life changing. If you have questions about §529 plans or how they may fit into your estate plan, contact Gudeman & Associates, P.C. to discuss your goals and available options.
