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529 Plan Basics

When it comes to estate planning, everyone has different goals. For many parents with minor children, a common estate planning goal is to efficiently save for their children’s college or trade school education. There are several options that provide a way to achieve this goal and an individual inquiry is necessary to choose the right one for you.

One way to save for a minor child’s college education is through the establishment of a 529 Plan. A 529 Plan is a savings plan with tax benefits that encourage savings for education costs in the future.[1] Such plans are also known as “qualified tuition plans” and are referenced as such in legal publications, statutes, and regulations. Practically speaking, the plans were created by the federal government and are administered by states to help families efficiently save for a child’s higher education, including college or trade school. The money put into these plans grow tax-free.[2] Once funds are contributed to a 529 Plan, withdrawals from a 529 Plan are also tax-free so long as they are used for qualified higher education expenses.[3] Qualifying expenses include tuition, fees, room & board, books, computer, software, internet access, and required equipment or supplies for higher education. Any other withdrawal can be made at any time but the earning portion of any nonqualified withdrawal will be subject to income tax and a penalty. In addition, state law provides tax incentives to contribute to a 529 Plan. For example, Ohio residents can claim a deduction up to a $4,000 on their state income tax return for 529 Plan contributions.[4]

There are two types of 529 plans:

(1) Prepaid Tuition Plans operate under the procedure where the account holder purchases units or credits at a participating college or university for future use towards tuition at those particular institutions. The price of tuition is frozen for the purposes of the credits.

(2) Education Savings Plans operate under a procedure similar to an investment account whereas the funds are contributed and grow, but the funds in the account are earmarked to pay for qualified higher education expenses. Withdrawals from the account can generally be used to pay qualified expenses at any college or university.

Any adult can own and control a 529 Plan. The owner of the account controls all decisions involving withdrawal of funds. Each donor, which can be different than the account owner, can contribute funds in a 529 Plan up to the annual limit. In 2022, the annual limit is $16,000 per donor.[5] Any amount contributed over the annual limit must be reported to the IRS on a gift tax return and will count against the donor’s lifetime estate and gift tax exemption, which is approximately $12 million per person in 2022.[6] These rules apply until the aggregate value of the account reaches the statutory maximum allowed by state law.[7]

If you are interested in laying the framework to save for a minor’s college or trade school expenses, consider a 529 plan. The restrictions on a 529 plan are specific to each individual plan and usually depend on the company chosen to facilitate the account and the state of account origin. Remember to weigh these factors to decide whether this college savings option is best for you. If you choose to move forward with setting up a 529 Plan, remember to add an alternate or successor owner of the account to avoid the scenario where it becomes a probate asset at your death.

[1]SEC Report and Investor Publication Introduction for 529 Plans, [2] [3] Id. [4] Id. [5] Maximum 529 Plan Contribution Limits By State, Kathryn Flynn, publ. March 29, 2022. [6] Id. [7] Id.

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