With the pace of higher-education costs rising faster than the general Consumer Price Index, it’s easy to understand why saving enough money to fund a child’s college education has become a financial challenge for many parents and grandparents. So whether college for your child or grandchild is years away or right around the corner, put time on your side — consider the benefits of contributing to a 529 plan for a student in your family.
The student can use 529 plan account balances at any participating accredited postsecondary school in the
United States or certain schools abroad for tuition, room and board, books, equipment, and supplies. Qualified expenses also include computer technology, related equipment and Internet-access costs.
As the owner, you retain control of the assets and can change beneficiaries within the designated student’s family at any time without penalty. A qualified family member generally includes siblings, descendants, ancestors, aunts, uncles and first cousins. Other key advantages of these plans include:
• Federal-income-tax-free qualified distributions. The student may be able to take qualified distributions federal-income-tax-free.
• No income limitations for participation. There is no income limit for contributing to a 529 plan, which is a benefit for higher-income families.
• Substantial contribution amounts. A single person can contribute up to $65,000 in one year per beneficiary; a married couple can contribute up to $130,000 in one year per beneficiary with no gift-tax consequences. Such a contribution will be considered a five-year accelerated annual-exclusion gift, so no additional gifts can be made for that beneficiary for the next four years without incurring gift-tax implications unless the annual exclusion gift increases.
• Significant estate-planning benefits. The gift amount and subsequent appreciation, however, are removed from your taxable estate. (A portion of the contribution amount may be included in the donor’s taxable-estate calculation if the donor should die within the five-year period.)
Keep in mind that 529 plan investment balances may affect eligibility for financial aid:
• If a parent owns the 529 account, up to 5.64% of the value is included in Expected Family Contribution as a parental asset. Any 529 accounts owned by a dependent student, or by a custodian for the student, are reported on the Free Application for Federal Student Aid (FAFSA) as a parental asset. Any qualified withdrawals from these accounts are not included as income to the student.
• If a 529 account is owned by a grandparent (or someone other than a parent or the student), the value of the 529 plan is not reportable as an asset on the FAFSA.
However, any distributions from these third-party accounts are considered financial support to the student and are reportable on the following year’s FAFSA as student income. Student income is assessed at the student’s rate of 50%.
An investment in a 529 plan will fluctuate such that the shares when redeemed may be worth more or less than the original investment. There are no guarantees that an investment in a 529 plan will cover higher-education expenses. Investors should consult the plan’s offering document for the fees and expenses associated with that plan. You should consider a 529 plan’s investment objectives, risks, charges and expenses carefully before investing.
As Wells Fargo Advisors does not render tax advice, you should consult with a tax advisor before making any investment decisions which could have tax consequences. This article was written by Wells Fargo Advisors and provided courtesy of Katie C. Phifer CFP®, Financial Advisor at 843-524-1114. Investments in securities and insurance products are: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE. Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.
