529 Plans and Planning for Your Grandchildren’s Futures
Key Points – 529 Plans and Planning for Your Grandchildren’s Futures
- What Tax Benefits Apply with 529 Plans?
- Kansas and Missouri Residents Have Some Exclusive 529 Plan Benefits
- How the SECURE Act Has Impacted 529 Plans
- The Two Different Types of 529 Plans
- 3 Minutes to Read
It seems like special moments always happen in a flash—especially the times you treasure with your grandchildren. One minute, they’re starting to take their first steps. Then, suddenly, they’re taking much bigger steps across a stage for their high school and possibly college graduations.
Of course, there will be life lessons, big and small, that you’ll get to teach them as they’re growing up. But we know that many of you want to go the extra mile for your grandchildren by funding their education. A big part of doing so—all while keeping taxes in mind—involves a 529 plan.
What Is a 529 Plan?
Per the SEC, 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.”
If you perked up when reading “tax-advantaged savings” at the beginning of that definition, you probably weren’t alone. There are two types of tax benefits that come into play here. There are federal tax benefits, as 529 plan contributions grow tax-free. Federal income tax doesn’t impact the earnings when they are taken out for the qualified education costs. Then, there are state tax benefits. There are 30-plus states where people can take advantage of state income tax deductions or tax credits for 529 plan contributions.
Exclusive Perks for Kansas and Missouri Residents
Most states require you to contribute to your home state’s 529 plan to be eligible for the state income tax benefit. But that’s not the case for Kansas and Missouri residents. The Sunflower State and Show Me State are two of seven states that offer a state income tax benefit for any 529 plan.
If you’re a Kansas resident, you are eligible to claim a state tax deduction on maximum annual contributions of $3,000 (or $6,000 if you’re married and filing jointly). Again, that applies to Kansas 529 plans and out-of-state plans. If you’re a Missouri resident, you’re in even better luck. You’re eligible to claim a state tax deduction on maximum annual contributions of $8,000 (or $16,000 if you’re married and filing jointly). That is the case for Missouri 529 plans and out-of-state plans as well.
The SECURE Act’s Impact
Just as tax laws seem to be ever-changing, it’s important to stay up to date on the ins and outs of 529 plans. In 2019, the SECURE Act made some very impactful changes to 529 plans by adding the repayment of qualified education loans to the list of qualified higher education costs. We’ll get to some specifics on withdrawal limits here in a second when we discuss education savings 529 plans.
Prepaid Tuition Plans
When it comes to 529 plans, there are prepaid tuition plans and education savings plans. The prepaid tuition plan allows you to buy units/credits at certain academic institutions for future tuition for your grandchildren or whoever’s educating you are funding. However, there are a couple of caveats with the prepaid tuition plans. They usually aren’t permitted for paying for future room and board for higher education institutions. Additionally, prepaid tuition plans don’t pertain to tuition at secondary and elementary schools.
Education Savings Plans
On the flip side, the education savings plan allows you to start an investment account to save for your loved one’s qualified college academic expenses. Those expenses include tuition, obligatory fees, and yes, room and board. The withdrawals from these plans are widely accepted at most colleges, both at U.S. and international schools.
With the education savings plans, you can also pay a maximum of $10,000 per student to help cover their elementary or secondary education tuition. There is also some flexibility here when it comes to portfolio investment options, ranging from mutual funds and ETFs or a principal-protected bank product.
Fees and Expenses
Along with there being differences between the education savings plans and prepaid tuition plans, there is a wide range of fees and expenses with all 529 plans. The key takeaway to keep in mind with those fees and expenses is that they’ll reduce your returns. For prepaid tuition plans, you can be assessed with an enrollment fee and reoccurring administrative fees. For education savings plans, you could be tasked with the application fee, yearly account maintenance fees, and reoccurring fees for program and asset management. The collection of the fees is done by the plan manager or 529 plan’s state sponsor.
School Is in Session Year-Round for Education on 529 Plans
While school might be out for your children and grandchildren, the studying doesn’t stop for us at Modern Wealth Management. If you’re a Modern Wealth Management client and have questions about your 529 plan options, please don’t hesitate to contact your advisor.
We also welcome any questions about 529 plans from non-Modern Wealth Management clients. You can schedule a 20-minute “ask anything” session or a complimentary consultation with one of our CERTIFIED FINANCIAL PLANNER™ professionals today. You can help your loved one’s mission to walk across the stage by simply walking into our office, calling us, or meeting with us virtually.
Schedule Complimentary Consultation
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Investment advisory services offered through Modern Wealth Management, Inc., an SEC Registered Investment Adviser.
The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.