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Year-End Financial To-Do: Review 529 Plans and Education Expenses – 2021

By Eric Estelle, Manager, Financial Planning & Marketing


Year End 529 PlanWith only a few weeks left in the year, it is important to check all the boxes on your financial planning to-do list. Not everyone has 529 plans near the top of their list, but if you have a 529 plan, it is important to look at several items related to education savings and expenses before year end.

Avoid taxes and penalties

If you are utilizing 529 funds now, as long as they are used for qualified education expenses, a 529 balance grows tax-deferred and withdrawals are tax-free. However, if 529 assets are used for non-qualified expenses, the portion of the withdrawal considered to be gains will be subject to taxes and additional penalties. To avoid this, be sure that 529 withdrawals equal the amount of qualified education expenses for the year. There are many items considered qualified educational expenses including post-secondary tuition and fees, room and board (if enrolled at least half-time), books, and other supplies. Recent legislation has also allowed 529 assets to be used for K-12 tuition (up to $10,000 per year) and up to $10,000 to re-pay existing student loans. Other items might be considered qualified education expenses, so ask your financial advisor to be sure you are not over or under counting your qualified expenses.

Possible tax deductions for contributions

If you are thinking about contributing to a 529 plan, there are some other items to consider. First, some states allow contributions to be tax deductible. It is important to know that these tax deductions only apply to state taxes, not your federal return. Some states require specific 529 plans be used for deductibility. Next, some states require contributions be made before year end, while others allow contributions to be deductible if made by the tax filing deadline. Additionally, the maximum tax deduction varies from one state’s plan to another. Check with your financial advisor or state government to find out if your 529 plan contributions are eligible for any tax deductions.

Utilize annual exclusion gifts

For 2021, the maximum annual exclusion gift is $15,000 per year, per person. This means a married couple could gift up to $30,000 per year to as many people as they would like. These gifts don’t have to go to a 529 plan, but it can be a great way to utilize some or all of this annual gifting allowance. A unique aspect of gifting to a 529 plan is a concept called “front-loading.” This allows you to use up to five years’ worth of annual exclusion gifts in a single year. A single person could gift up to $75,000 at once, or up to $150,000 for a married couple. Keep in mind you would not be allowed to make additional gifts to the 529’s beneficiary for five years without having to file a gift tax return.

A 529 plan can be a great way to save for future education expenses, but the rules surrounding these plans are complicated. Financial aid, investment decisions, what is or isn’t considered qualified expenses, and how much you should contribute are just a few of the things to analyze. Include your financial advisor in these decisions and ask for education planning to be a part of your family’s comprehensive financial plan.