529 plans are the ultimate package for parents seeking effective strategies to fund their child's education journey. The beauty of these plans lies in their tax advantages. As we discussed in our previous post, ‘How 529 College Savings Plans Work’, the earnings within the account are entirely tax-free upon distribution, provided they're utilized for qualified education expenses. Although, this isn’t the only tax benefit awarded.
Numerous states extend the generosity of offering state income tax benefits to contributors of their (the state’s) 529 plans. Even more so if you're residing in Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, or Pennsylvania, your state rewards your commitment to education savings with tax benefits for contributing to ANY state's 529 plan. In other words, you can live in Kansas, contribute to an Arkansas 529 plan, and get the Kansas state tax deduction.
Those looking to use annual gifts, or seeking estate planning techniques, can also take advantage of the 529’s tax benefits. Up to $17,000 annually (the annual gift tax exclusion for 2023) can be contributed to a 529. Further, you can fund the account with a lump sum of up to $85,000 and elect to treat the contribution as made over a five-calendar year period for gift tax purposes. This is an excellent resource for those looking to reduce their estate tax exposure through gifting while maintaining control of the assets. However, there are a couple of nuances; first, if you were to revoke the account, the value would go back into your estate. Secondly, if you were to pass away before the fifth year, a portion of any contribution made with the five-year averaging election would be included in your estate.
As mentioned, the biggest tax advantage of 529 plans is the compound growth of tax-free dollars. Parents contributing either as a lump sum, or through regularly scheduled contributions, can benefit greatly by investing early in their child’s education and allowing the investment to grow tax-free. Consult with your investment advisor to learn more today!