What is a 529 Education Savings Plan and what are the benefits? How do tax-advantaged 529 plans help me save for my child’s college education? What is a 529 ABLE account and can a 529 plan be transferred to an ABLE account? CunninghamLegal can help you understand all the Benefits of a 529 Education Savings Plan and why it’s such a great Estate Planning tool.

Named after a section of the tax code enacted two decades ago, 529 education savings plans are tax-advantaged plans that encourage parents to save money for their children’s education. Although contributions are not deductible, the invested assets can grow free of federal and state taxes. There are two types of 529 plans – one lets you pre-pay tuition at a qualified education and lock in current tuition rates, while the other lets you invest in a tax-deferred account that can be used to pay in the future for tuition.

Traditionally, withdrawals are tax-free if they are used to pay eligible education expenses such as college tuition, books, room and board, fees, and possibly even computers. But things have changed in the last few years as to where this money can be spent, and there are a few helpful benefits that you may not know about.

Paying for K-12 Education with a 529 Plan in CA

A significant change in the new tax law is the gift of flexibility: 529 plan assets can now be used for up to $10,000 per year, per student, for private, public, or religious and secondary school tuition for K-12. This alleviates concerns of “what if I save all this money and my child doesn’t go to college?” All earnings are exempt from federal taxes when withdrawn for appropriate expenditures, providing a huge tax advantage.

Of note is that private schools will likely want to know about a families’ 529 savings and may take that information into account when making financial-aid decisions for the school year.

Are 529 Plans Different by State?

529 plans do not have any residency requirements. You can invest your money in any college in any state, or any state’s plan…regardless of where you reside. There are variations in the features that each state provides, so doing your research will provide great benefit. Some states even require the use of a financial advisor or brokers to buy into their plan, so make sure to factor these additional costs into your budgeting.

529 Offers Control Over Access

Unlike some other education savings accounts, you will maintain control over your plan instead of worrying about the money falling into the hands of an irresponsible Beneficiary; the named Beneficiary has no legal rights to that money. There are no restrictions for whom you can open these accounts – it can be a family member, friend, co-worker, or even yourself.

Transfers to 529 Able Accounts

In another meaningful change, the new tax laws enable savers to transfer funds from 529 plans to 529 ABLE accounts. ABLE accounts are for people who become blind or disabled before age 26, and the person’s access to Medicaid and Social Security income, or SSI benefits is not limited.

Like 529 plans, 529 ABLE plans allow assets to grow tax-free. Annual contributions are capped at $15,000, and withdrawals can be tax-free if used to pay expenses such as housing, legal fees and employment training. Total assets in an account can reach $100,000 without affecting SSI benefits.

The recent change allows transfers of up to $15,000 a year from a regular 529 plan to a 529 ABLE account. The ability to make such transfers avoids a significant drawback: that after the disabled person’s death, remaining funds in an ABLE account typically go to the state to repay benefits if the person was receiving Medicaid—as many are.

But the assets of a regular 529 plan needn’t go to the state at death. Someone could fund a 529 account for a disabled person and transfer money from it as needed to a 529 ABLE account. This arrangement offers tax-free growth and perhaps a state-tax deduction, without giving up ownership of assets.

The 529 Plan as Estate Planning Tool

Did you know that a 529 plan account can be a great Estate Planning tool that can be stretched to benefit multiple generations? Once one child has completed his or her education, the remaining balance continues to grow tax-free until the next child is ready to enroll. You remain in full control of the assets and can determine account ownership or change the beneficiary.

No matter your stage of life, it’s never too late to save for an education for a loved one. With some simple strategy and some help from your legal and financial advisors, you can find ways to reduce college costs and increase the ways to pay for it.

Please consult with your tax professional regarding your individual tax situation.

What Do We Do as California Estate Planning Attorney Specialists?

The lawyers and staff at CunninghamLegal help people plan for some of the most difficult times in their lives; then we guide them when those times come.

Make an appointment to meet with CunninghamLegal for California Estate Planning and Trust Administration. We have offices throughout California, and we offer in-person, phone, and Zoom appointments. Just call (866) 988-3956 or book an appointment online.

Please also consider joining one of our free online Estate Planning Webinars.

We look forward to working with you!

Best, Jim

James Cunningham Jr., Esq.

Founder, CunninghamLegal

At CunninghamLegal, we guide savvy, caring families in the protection and transfer of multi-generational wealth.

  tel: 805.312.7200


Source: Ascent Wealth Management, a financial services partner.


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