By Theresa Cagle Fry, Senior Vice President and Manager IRAs, Retirement & Education Planning
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If you have college-age children or grandchildren, this time of year can be a welcome homecoming both for you and for them. Whether you are dealing with college costs 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.
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 when contributions are made 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 $18,000 for 2024 (increasing to $19,000 in 2025). 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 $90,000 for 2024 ($180,000 if both parents elect to use advanced gifting). If you take advantage of advanced gifting to a 529 savings plan, keep in mind that you cannot make any other taxable gifts to that individual during the five-year period. 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, the withdrawals are income tax free.
Qualified Withdrawals and Current Year Expenses
Qualified withdrawals are generally those that are required for enrollment or attendance, such as tuition and fees, room and board, or books and supplies. With a qualified withdrawal, 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.
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. And once you begin using a 529 education savings plan, it’s important to avoid nonqualified withdrawals. 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.