Do 529 Plans Fit Into Your Planning?

The 529 plan was originally designed as a savings account specifically to pay for qualified higher education expenses, including tuition, books, room, and board. Further expanding 529 plans, the 2017 tax reforms established qualified withdrawals for K-12 school tuition at public, private, and religious schools. These reforms also allow a person with a disability to roll over a traditional 529 plan into a 529 ABLE account without adverse tax consequences.

Like retirement accounts, 529 plans have tax advantages that help you keep more of your savings. Earnings on accounts grow federal and state tax-exempt and qualified withdrawals are tax-free. Accounts can be set up for anyone (not just your own children) and contributions into the account can be made by anyone. In fact, if you have the wealth, you can take advantage of a special averaging provision for contributions over the annual gift tax exclusion limit without triggering gift tax consequences (just make sure you comply with IRS reporting requirements for the contribution). This means a single $75,000 contribution, or $150,000 if married and filing jointly, may be treated as if it were made over a five-year period. Making an “up front” contribution allows the investment to grow over a longer period, maximizing its value.

Nevada has a variety of well-regarded 529 plans, and each accepts contributions up the State’s maximum allowable account value of $370,000. We have three direct-investment plans, a pre-paid tuition program, and an advisor-sold program. The initial investment requirement varies with each plan and investment options include age-based and static portfolios. Nevada also offers students scholarship opportunities to increase 529 plan savings. Qualified education expenses include up to $10,000 per year for K-12 tuition, while qualified post-secondary institution expenses include tuition, fees, books, supplies, and equipment required for enrollment. Expenses for computer and peripheral equipment, software, internet access, and related services used by the beneficiary while enrolled can also qualify. Notably, you are not limited to investing in your state’s plan; another state may offer a plan with better investment options, lower fees, or preferred features.

The ABLE Nevada Plan allows a person with a disability to establish a 529-style savings plan without necessarily forfeiting government benefits. Qualified expenses under these special plans include education, housing, transport, assistive technology, health care, and other specifically approved expenses. A person can only have one ABLE account, eligibility is based on a disability that began before age 26, and contribution limitations are distinct. While anyone can contribute to an ABLE account, the total annual contributions from all sources is limited to $15,000 for 2018, even though these accounts have the same $370,000 overall limit as traditional 529 plans.

Traditional 529 plans and the ABLE Nevada Plan are valuable tools for educational savings. These plans also offer estate and gift tax advantages that can benefit your overall estate plan. If you would like to explore helping someone with their educational expenses, contact Kling Law Offices for a free consultation to discuss how 529 plans can effectively fit into your estate plan.