Saving for College
By Livia DeMarchis
As everyone knows, college is expensive. While it can be helpful to think of a college degree as an investment in your child or grandchild’s future, rather than as an expense, it can still be difficult to fathom how to finance the cost.
529 plans are one powerful, tax-advantaged tool that families can use to help with education-savings. There are a number of advantages to 529 plan savings.
Federal tax benefits
Investments in a 529 plan grow on a tax-deferred basis, and distributions from the account, if used for a qualifying education expense, are tax-free.
State tax benefits
529 plan earnings are generally also excluded from state and local income tax if used to pay for qualifying education expenses. In addition, a number of states provide a tax credit or deduction for some or all of the contribution made to their program in a given year. For example, Vermont’s official 529 college savings plan, VT529 (formerly VHEIP), offers any Vermont taxpayer a state income tax credit of 10% of the first $2,500 contributed to VT529 per beneficiary, per tax year. A married couple filing jointly, can get a tax credit of 10% of the first $5,000 contributed per beneficiary per year. Rollovers into VT529 from another state’s 529 plan are also eligible for the tax credit on the contributions portion of the rollover, as long as the funds remain in VT529 for the remainder of the tax year.
Gift and estate tax benefits
Gifts to a 529 plan qualify for the annual gift-tax exclusion, which is currently $16,000 per recipient. As such, you can remove up to $16,000 per recipient per year from your taxable estate without using any of your lifetime federal gift and estate tax exemption amount.
Section 529 also permits an election that allows the grantor to “superfund” a 529 plan by treating a contribution of more than the annual exclusion amount as being gifted over five years for gift tax purposes. Electing to superfund a 529 plan will allow a grantor to contribute as much as $80,000 in 2022 to an account for one beneficiary without triggering a taxable gift, assuming that no additional gifts are made to the same beneficiary from the same grantor during the five-year period from 2022 through 2026. The election to superfund a 529 plan can be made on the grantor’s federal gift tax return for the year of the contribution. Unless the grantor dies during the five-year period encompassed by the election, the value of the entire $80,000 contribution is excluded from his or her gross estate.
Investment and savings benefits
States usually try to keep the fees and expenses associated with investing in a 529 plan as low as possible, and the plans themselves generally offer a wide range of investment options. Numerous 529 programs, including VT529, offer automatic contribution options through payroll deduction or electronic funds transfer, which can help encourage regular saving.
Availability and control
529 plans are not limited to those under a certain income threshold, so high-income grantors can utilize them. And while a grantor’s contributions are treated as completed gifts, allowing them to qualify for the annual gift-tax exclusion, the grantor still retains ownership and control over the account they establish for a beneficiary. The account owner can change the beneficiary of the account, and the owner—not the beneficiary—decides when and why to take distributions.
Asset protection
Some states, though not Vermont, provide specific protection for 529 plans against the claims of creditors. Qualifying assets in a 529 plan should also be protected in the event of bankruptcy. As our CEO, Chris Cassidy, mentioned in his introduction, Trust Company of Vermont does not manage 529 plans, but we can help our clients better understand their 529 plan options and can assist in opening and reviewing these important accounts.