Saving For Education:
+ New Free Tax & Financial Question
Many parents are looking for
ways to save for their child's education and a 529 Plan is an
excellent way to do so.
Even better, is that thanks to the passage of tax reform
legislation in 2017, 529 plans are now available to parents
wishing to save for their child's K-12 education as well as
college or vocational school.
You may open a Section 529 plan in any state, and there are no
income restrictions for the individual opening the account.
Contributions, however, must be in cash and the total amount
must not be more than is reasonably needed for higher
education (as determined initially by the state). There may
also be a minimum investment required to open the account,
typically, $25 or $50.
Each 529 Plan has a Designated Beneficiary (the future
student) and an Account Owner. The account owner may be a
parent or another person and typically is the principal
contributor to the program. The account owner is also entitled
to choose (as well as change) the designated beneficiary.
Neither the account owner or beneficiary may direct
investments, but the state may allow the owner to select a
type of investment fund (e.g., fixed income securities),
change the investment annually as well as when the beneficiary
is changed. The account owner decides who gets the funds (can
pick and change the beneficiary) and is legally allowed to
withdraw funds at any time, subject to tax and penalties (more
about this below).
Unlike some of the other tax-favored higher education programs
such as the American Opportunity and Lifetime Learning Tax
Credits, federal tax law doesn't limit the benefit only to
tuition. Room, board, lab fees, books, and supplies can be
purchased with funds from your 529 Savings Account. Individual
state programs could have a more narrow definition, however,
so be sure to check with your particular state.
Distributions from 529 plans are tax-free as long as they are
used to pay qualified higher education expenses for a
designated beneficiary. Distributions are tax-free even if the
student is claiming the American Opportunity Credit, Lifetime
Learning Credit, or tax-free treatment for a Section 530
Coverdell distribution--provided the programs aren't covering
the same specific expenses. Qualified expenses include
tuition, required fees, books, supplies, equipment, and
special needs services. For someone who is at least a
half-time student, room and board also qualify. Also, starting
in 2018, "qualified higher education expenses" include up to
$10,000 in annual expenses for tuition in connection with
enrollment or attendance at an elementary or secondary public,
private, or religious school.
expenses also include computers and related equipment used by
a student while enrolled at an eligible educational
institution; however, software designed for sports, games, or
hobbies does not qualify unless it is predominantly
educational in nature.
if you missed the Live Event I'm
inviting you to watch the REPLAY! Just
Income Tax. Contributions made by the account owner or
other contributor are not deductible for federal income tax
purposes, but many states offer deductions or credits.
Earnings on contributions grow tax-free while in the program.
Distribution for a purpose other than qualified education is
taxed to the one receiving the distribution.
In addition, a 10 percent penalty must be imposed on the
taxable portion of the distribution, comparable to the 10
percent penalty in Section 530 Coverdell plans. Also, the
account owner may change the beneficiary designation from one
to another in the same family. Funds in the account roll over
tax-free for the benefit of the new beneficiary.
Gift Tax. For gift tax purposes, contributions are
treated as completed gifts even though the account owner has
the right to withdraw them - thus they qualify for the
up-to-$15,000 annual gift tax exclusion. One contributing more
than $15,000 may elect to treat the gift as made in equal
installments over that year and the following four years, so
that up to $75,000 can be given tax-free in the first year.
Estate Tax. Funds in the account at the designated
beneficiary's death are included in the beneficiary's estate -
another odd result, since those funds may not be available to
pay the tax. Funds in the account at the account owner's death
are not included in the owner's estate, except for a portion
thereof where the gift tax exclusion installment election is
made for gifts over $15,000. For example, if the account owner
made the election for a gift of $75,000 in 2018, a part of
that gift is included in the estate if he or she dies within
Tip: A Section 529
program can be an especially attractive estate-planning move
for grandparents. There are no income limits, and the account
owner giving up to $75,000 avoids gift tax and estate tax by
living five years after the gift, yet has the power to change
State Tax. State tax rules are all over the map. Some
reflect the federal rules, some quite different rules. For
specifics of each state's program, see
Considering the differences among state plans, the complexity
of federal and state tax laws, and the dollar amounts at
stake, please call the office and speak to a tax and
accounting professional before opening a 529 plan.
If you have any questions about saving for education and 529
hesitate to call the office at 301-657-8080.
DID YOU KNOW
that Sullivan & Company manages Pension Funds,
Retirement Plans & Taxable Accounts through Archer
Investment Corporation & Fidelity Investments for our
Fidelity is the custodian for more
retirement plans than any other custodian in the United
Let Sullivan & Company Analyze Your Asset Allocation
& Risk Tolerance for FREE!
Management at Sullivan & Co. CPAs
Sullivan leads our
Group and is here to help you navigate your
As Investment Advisor
Representatives, he and our Wealth Management team are able
to provide an independent opinion on the investments you
already own or are considering buying.
We can structure a portfolio
based on your risk tolerance or we can help you decide how
to invest in your company 401(k) plan.
We work with each
client to identify their concerns and to provide solutions
according to their situation.
is also experienced in company retirement plans. If you own
a business that does not have a plan; we can discuss your
options and set up a plan that fits your company.
If your business already has a
plan; we offer a free evaluation of the plan to ensure that
it is up to date and working well for you and your
Our goal is to provide personal, unbiased and independent
advice to help you make well-informed decisions about your
financial life and investments.
Contact Chris Bailey, CPA, MBA, IAR
or Paul Sullivan, CPA, IAR to set up a free
initial consultation (301) 657-8080.
And as always if you have any questions about accounting or
investments and how they effect you or your business, please
give us a call. We can help guide you in the right
you can call our offices if you have any questions about these
or any other accounting, tax, financial planning or insurance
related issues, at 301-657-8080.
Regards, Paul Sullivan, CPA, IAR
President, Sullivan & Company