NOTEWORTHY

College Funding Tips from Laly Kassa

Laly Kassa: While deciding on the best way to save for college depends on your family’s unique situation, for many, the 529 plan offers the most flexibility and tax advantages:

Flexibility:

  • Account balances may be used for college tuition, room, board, fees, books, supplies and computers. Graduate school and vocational school expenses are also eligible.
  • Up to $10,000 per year may be used for grades K-12 tuition.
  • Account owners may change beneficiaries. For example, funds that aren’t used by one child may be applied to another child or extended family member.
  • Large variety of investment choices including age-based portfolios that become more conservative over time.

 

Tax Benefits:

  • Balance grows tax-free, and no tax is due on distributions as long as the funds are used for qualified education expenses.
  • Special provision that allows individuals to “frontload” 5 years of gifts, or up to $75,000 per beneficiary in 2019, and have the entire amount eligible for the annual gift tax exclusion. (Confer with your tax advisor if this technique is used; a federal gift tax return must be filed if more than $15,000 is given in one calendar year.)
  • Not included in account holder’s estate (as long as the 5-year period has passed for any frontloaded contributions).
  • Depending on your state, the contribution amount may be fully or partially deductible for state income tax purposes.

 

Additionally:

  • Parent-owned accounts receive favorable treatment for the federal financial aid asset calculation (only 5.64% of value is counted), and withdrawals are not included in income when calculating the expected family contribution. (Rules are different for grandparent accounts.)
  • Any withdrawals that are not for qualified educational expenses are subject to income tax and a 10% penalty.