When I was a student at Wash High, I always remember a math teacher who always demanded and expected your best effort. For this individual, an education was the greatest gift a person could receive.
With the holidays approaching and the supply chain chaotic, perhaps this year parents and grandparents should consider opening an education savings account. Education savings accounts, known as 529 plans, are state-sponsored education plans named after a section of the Internal Revenue Service code. Funds deposited in 529 plans are invested in mutual funds and exchange traded funds on a federal after-tax basis. Income is not taxed when withdrawn if used for qualifying educational expenses for a beneficiary. These expenses include tuition, books, computers, Internet access, supplies, equipment and fees. College students enrolled at least part-time may also include room and board. For Kindergarten to Grade 12 students, the only authorized expense is $ 10,000 in tuition.
One of the advantages of using a 529 plan for education savings is that contributions to these plans are considered gifts for tax purposes. In 2021, that means you can contribute up to $ 15,000 per beneficiary ($ 30,000 per married couple) to a 529 plan without having to pay gift tax. If you established more than one 529 plan this year, you can contribute up to $ 15,000 to each without having to file a tax return.
Even if you contribute more than $ 15,000 to a 529 plan in a calendar year, you may not have to pay gift tax, as the excess can be deducted from the exemption. life of $ 11.7 million on inheritance and gift tax.
Another nuance with gift tax laws is that you have the option of “superfinancing” a 529 plan, using an average of gift tax over five years. This means that you can make a lump sum contribution of up to five times the annual gift tax exclusion, or $ 75,000 this year, into a 529 plan without paying gift tax and treat it as if it was spread over five years.
In addition to the benefits of the federal gift tax exclusion, many states offer tax benefits on 529 plans. In Pennsylvania, you can deduct your contributions from your taxable income up to $ 15,000 per beneficiary per year. Married couples can deduct up to $ 30,000 per beneficiary, per year, provided each spouse has taxable income of at least $ 15,000.
While there are no annual contribution limits to 529 plans, there are maximum overall limits ranging from $ 235,000 to $ 550,000, depending on the state. These upper limits represent a state’s estimate of the total cost of attending college or graduate school in that state. The mere fact that states believe this cost to future education is high should be a good reason to open an account today.
The total assets of 529 plans nationwide stand at $ 464.3 billion, according to the College Savings Plans Network, a clearinghouse for information on 529 plans. There are 15.3 million accounts, with an average value of $ 30,287.
With all of the 529 plans, you will have investment choices. Time horizons (when will funds be used) and risk tolerance (stocks versus bonds) will come into play. Check plan ratings and understand their costs. The longer an investment is held, the greater the potential for returns. Starting early is always the best course of action. The gift of education is a tremendous and lasting gift.