By Theresa Cagle Fry, Senior Vice President and Manager IRAs, Retirement & Education Planning
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For most people, the holidays mean celebrating and spending time with family and friends. If you have college-age children or grandchildren, the holidays can be a welcome homecoming both for you and for them. Whether dealing with college costs is your current reality or it’s years away, December 31 is an important deadline for education planning if you want to take advantage of the tax benefits of 529 education savings plans. It is both the deadline for contributing for this year and for taking withdrawals to offset your current-year qualified expenses. This year, December also marks the delayed opening for filing the Free Application for Federal Student Aid (FAFSA) for students enrolling for the 2024-25 academic year.
529 Education Savings Plan Contribution Deadline
529 education savings plans are a tax-advantaged way to save for future education costs. Contributions are gifts to the student (beneficiary) and, although they are not tax-deductible on your federal income tax return, many states offer their taxpayers a deduction or tax credit if you contribute to your state’s sponsored 529 savings plan. Check with your tax professional to see what, if any, state income tax benefits apply to you.
A gift to a 529 plan cannot exceed the annual gift limit of $17,000 for 2023 (increasing to $18,000 in 2024). This amount can be doubled if each parent makes contributions for the same student. However, you can also make a special five-year advanced gifting election by filing a federal gift tax return. This allows you to make five years of gifts in one year, increasing the contribution to $85,000 for 2023 ($170,000 if both parents elect to use advanced gifting). Contributions must be made by December 31 to count for this year’s gift.
Investments in a 529 savings plan grow tax-deferred, and when used for qualified education expenses, those required for enrollment or attendance, the withdrawals are income tax free.
Qualified Withdrawals and Current Year Expenses
Once you begin using a 529 education savings plan, it’s important to avoid nonqualified withdrawals. When used for qualified education expenses, such as tuition and fees, room and board, or books and supplies, 529 plan earnings are income tax free. Conversely, earnings are taxable and subject to a 10% tax penalty when you take a nonqualified withdrawal.
Nonqualified withdrawals can result if the amount you take out of the 529 education savings plan exceeds current-year qualified expenses. Therefore, the end of the year is a good time to review the year’s expenses and how they match up to your 529 plan withdrawals. Keep in mind, too, that many expenses that students incur are not considered “qualified,” including travel expenses to and from school, club or athletic fees, cell phone plans, health insurance plans, or college test or application fees such as for the ACT, SAT or CLEP.
Major FAFSA Changes for 2024-25 Academic Year
If you have students enrolling for college for the 2024-25 school year, this year the FAFSA open date was moved from October 1 to December due to major changes and improvements to the form. The FAFSA is the application that most colleges and universities require to award federal student aid, such as grants, loans and work study programs. According to the Department of Education, the redesigned and streamlined form will be available by December 31, 2023[i].
The FAFSA has been criticized in the past due to its complexity and how confusing it was for both students and their parents to complete. The time commitment alone caused many individuals to not bother, or give up and never finish the application. The new form is reported to be as few as 18 questions and take less than 10 minutes to complete.
A Financial Advisor Can Help
Whether you have a loved one planning to attend college, a trade or vocational school, or even a private K-12 school, a 529 education savings plan can help you meet your financial and education planning goals. Contact your financial advisor before the year ends to put together a plan for saving in or using a 529 plan.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.
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[i] Launch of the 2024–25 FAFSA® Form | Federal Student Aid