Tax Advantages of 529 Plans

John Wolff, CFP® |

With the ever growing cost of education, a 529 plan can be a great vehicle to maximize education savings for your children, grandchildren or friends. Setting up a 529 plan is easy and the tax benefits can be substantial for both the account owner and beneficiary.

The tax benefits of using a 529 plan as a savings vehicle for education are multi-faceted. Contributions grow tax-deferred and distributions used for qualified expenses are free from state and federal tax when used for qualified educational expenses. This allows funds to accumulate quicker and to a greater extent than money saved in a taxable account such as an UTMA or brokerage account.

In Virginia, contributions are deductible from state income tax up to $4,000 each year for each account, with an unlimited ability to carry forward deductions to future years. This benefit can be maximized when each spouse opens an account for the beneficiary effectively doubling the tax deduction allowing the deduction to be increased to $8,000 per beneficiary each year.

In Maryland, contributions are deductible from state income tax up to $2,500 per year for each beneficiary with an unlimited ability to carry forward deductions to future years. Just as the with the Virginia plans, the deduction per beneficiary is maximized when each spouse opens an account for the beneficiary.

In Washington DC, contributions are deductible from state income tax up to $4,000 each year for singles and up to $8,000 each year for couples. Unlike the Virginia and Maryland plans, the tax benefit afforded is not multiplied by the number of different beneficiary accounts held by the account owner.

In addition to the state income tax deduction, 529 plans allow the owner to treat contributions as a completed gift with the unique ability to treat up to five years of gifts made for the current year. As the limit in 2019 is $15,000 ($30,000 if married filing jointly), one is able to contribute up to $75,000 ($150,000 if married filing jointly) in a single year without any gift tax consequences.

Giving the gift of education through a 529 plan is a great way help your loved ones prepare for a bright future as well as personally reap some tax savings for yourself.

 

Source: virginia529.com, maryland529.com, dccollegesavings.com, irs.gov

Disclosures:  The information presented herein is intended to be general in nature and is not intended to be tax or investment advice.  Rembert Pendleton Jackson, its employees and representatives are not authorized to give tax advice.  Further, guidance from any regulatory body, including the Internal Revenue Service, is subject to interpretation as well as modification by the agency itself at any time.  Accordingly the information presented herein may only be correct as of the date written.  Readers interested in the presented subject matter should consult with their personal financial and tax professionals, as there is no substitute for personalized advice.