The costs of college follow many people through their professional careers.
One way to help defray these costs is through federal “529 plans”, which allow account owners to deposit funds into accounts for named beneficiaries, often children or grandchildren.
Account savings grow free from federal and state income tax if used for qualified higher education expenses.
The 2019 SECURE Act broadened education expenses to include costs of qualified apprenticeships and up to $10,000 annually toward K-12 education.
Funds can further be used to repay beneficiary student loans of up to $10,000.
Depending on the sponsoring state and/or institution, contributions may receive a state income tax deduction.
The 2023 Wisconsin income tax deduction for 529 contributions is limited to $3,860 per year per beneficiary, for taxpayers filing as single or as married filing jointly.
A beneficiary includes a child, grandchild, or even yourself.
Wisconsin’s two state-sponsored 529 plans are Edvest and Tomorrow’s Scholar. Edvest accounts can be opened online by an owner, whereas Tomorrow’s Scholar accounts must be opened by a financial professional.
In either plan, account owners can select investment portfolios that meet their risk tolerance and savings objectives.
Account owners direct account distributions, including payments made directly to educational institutions.
Non-owner family members and friends can typically give to a 529 plan for a beneficiary.
Contributions to plans are considered gifts and depending on the amount, should be reviewed by tax counsel, and preparation of a gift tax return should be discussed.
One downside to 529 plans is that if account funds are not used for qualified education expenses, plan income is subject to federal and state income tax and a 10% federal tax penalty.
If several years of tax deferral have passed, withdrawal for non-qualified education expenses may be an “acceptable risk.”
If not, account owners may transfer accounts between eligible beneficiaries.
Starting in 2024, up to $35,000 (subject to the annual Roth IRA contribution limits) from 529 plans can be used to fund a beneficiary’s Roth IRA, without incurring taxes and penalties, subject to certain limitations.
Help your loved ones get a jump start on educational savings.
Contact your FOS attorney for guidance on how to make the most of 529 plans.
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