Jamie Canup, Partner
April 15, 2015
Happy Tax Day? Not something you typically hear on April 15th. If you invest in a 529 Plan you can congratulate yourself for making a wise investment choice that also comes with multiple tax benefits. 529 Plans are among the most tax-efficient instruments available for someone to save for future higher education expenses — whether those expenses are for you, your children, or your grandchildren (or frankly, anyone else).
We know that the cost of higher education continues to outpace inflation and we also know that the cost of not being educated in the 21st century is extremely high. What we sometimes ignore, however, is that a dollar saved for higher education today means one dollar less in debt tomorrow. In addition, in our rapidly changing and increasingly competitive workplace, planning for future education and re-training is key to achieving career satisfaction over a working lifetime.
Let’s not forget, though, that 529 Plans also provide many tax benefits that make investing in a 529 account a tax savvy option. Among these tax benefits are:
• The money you invest in a 529 Plan grows tax free while it is in the account.
• In addition, if you withdraw funds for the right purposes – namely qualified higher education expenses (such as tuition, fees, books, supplies and equipment required for enrollment or attendance at an eligible educational institution, along with certain room & board expenses) – you will not pay taxes on the earnings.
• If you live or pay taxes in a state that provides a state tax deduction or credit (34 of the 43 states that have an income tax do provide this tax benefit), then your contribution to a 529 Plan will qualify for that state tax deduction or credit resulting in added tax benefits to you for making the wise choice to invest in a 529 Plan.
• A contribution to a 529 Plan can be a very effective estate planning tool as it allows you, as the account owner, to control funds for your beneficiary while removing those funds from your estate.
• A contribution to a 529 Plan can be a great gift tax move if you want to take advantage of the five-year election to treat a contribution today (in excess of the annual gift tax exclusion) as being made over five years.
• Some 529 Plans even let you have your state income tax refund deposited directly into a 529 Plan account – how tax smart is that!
Please don’t hesitate to talk to your tax or financial advisor about these tax benefits or go to the resources tab of www.CollegeSavings.org to learn more about the benefits that 529 Plans offer. Each state’s 529 Plan website also provides information specific to that state’s program, including the tax benefits of investing in a 529 Plan. The states’ websites can also be accessed at the CSPN website.
So Happy Tax Day? Absolutely!!
About the author:
Jamie Canup is Chair of the Tax Practice at the law firm of Hirschler Fleischer based in Richmond, Virginia. He is also an active member of CSPN (and a former Chair of the Corporate Affiliates Advisory Board of CSPN), a frequent speaker at conferences and webinars on issues concerning tax-favored education provisions of the Internal Revenue Code, and has been quoted in The New York Times, USA Today, The Wall Street Journal and other publications on 529 Plans. He can be reached at email@example.com.