College is one of the largest expenses one will incur during their lifetime. With college tuitions rising steadily each year, and enrollment seeing a huge increase in the last few decades, the need to save for higher education is a serious reality. Taking advantage of all the tools available is highly recommended, and one of those tools is the 529 plan.
The 529 plan is an education savings plan through the state. For assistance with your 529 plan, Tax Associates of Bronx, New York can help you understand the guidelines of the 529 in New York State. Although they are state organized plans, the 529 plans can be used for college in any other state as well. You do not need to attend college in your state to take advantage of the savings in your 529 plan.
There are many benefits to a 529 plan. Earnings through a 529 plan are tax-free, and also not taxed as income when the money is taken out for college. This is essentially unparalleled by other types of accounts in relation to taxes. Usually, even savings accounts are subject to a capital gains tax. New York State also offers a deduction for contributions to your 529 plan. This deduction applies to reduce your gross earned income, thereby reducing your taxable income.
The 529 plan is ideal for parents wishing to save money for their children’s college expenses, or even grandparents wishing to do the same. The 529 plan names a beneficiary, but the owner of the account is the only one able to withdraw on the account, regardless of the age of the beneficiary. So even though the money is assigned to one beneficiary, the parent/owner of the account can still oversee withdrawals and monitor the account.
The 529 is also a very simple account to manage. You can have a regular amount deposited from your paycheck or bank account in intervals, and can usually enroll online. A state appointed investment company will then handle the account.
Federally, contributions to a 529 savings plan do not need to be reported on your tax return. You also do not need to report any gains or earnings on the account until the year you make a withdrawal. Deposits up to $14,000.00 per year also qualify for the gift tax exclusion, or if married filing joint, the qualification extends to $28,000.00.
The 529 plan has no age limit, income qualifications, or contribution limits per year. Therefore, anyone can open a 529 plan. There are lifetime contribution limits, which are set at $235,000-$400,000. You can roll over funds into another 529 plan once per year, and also change your options twice annually, making it a very flexible plan.
There are two types of 529 savings plans. Savings plans are based on investments, and your account will earn or decrease according to how well the option you selected is performing. Prepaid plans allow you to pay in advance the costs of public in-state education, but can also be converted to use at out of state or private colleges.
Of course, there are things to be careful of as well with a 529 plan. Most importantly, the large lump sum can be tempting, especially when your child’s college expenses start to get high. Withdrawals from a 529 plan are tax-free contingent on the fact that the withdrawal is made to pay for Qualifying Higher Education Expenses. Any additional withdrawal is a non-qualified distribution. This would mean that you would have to report the additional withdrawal as taxable income.
Qualifying expenses include books, supplies, tuition, student fees, and equipment. Room and board are also sometimes qualifying expenses. However, although they may be college-related, sports or club fees, computers, transportation, student loan payments and excess room and board (more than the school’s fee) are not qualifying expenses.
If you claim the American Opportunity credit, you will need to deduct the amount you claimed for the credit from the qualifying expenses. Your qualifying expenses will not be qualifying up to the amount you claimed.
Your 529 account will be reported as a parental asset on your student’s FAFSA form. Since this is a parental asset, it will not greatly affect the student’s expected contribution to tuition. Overall, this account provides much larger benefits than the small percentage of expected contribution that could be read from the FAFSA.
If you accidentally withdraw on your 529 account and feel you have taken more than the qualifying educational expenses will allow, call Tax Associates for assistance. They can help you take the additional withdrawal and roll it over into a different plan, using your one time per year allowance. If this is done within 60 days, the withdrawal will not count as a distribution, and no qualifying educational expense is needed.
If you have a student, or a dependent who will eventually attend college, contact Tax Associates of Bronx, New York. The tax professionals of Tax Associates can advise you on setting up your 529 account, reporting withdrawals of your account, and navigating the tax guidelines of your 529. Click below to speak with someone from Tax Associates.
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