A Guide to Tax-Advantaged Education Savings

529 Day is a day dedicated to raising awareness about the benefits of 529 plans and encouraging families to start saving for their children’s education- it’s never too soon to start saving! To help you get started, we’ve put together a list of the top 5 things you need to know about 529 plans.

1️⃣ 529 plans are tax-advantaged savings accounts designed to help families save for future education expenses.

A 529 plan is named after Section 529 of the Internal Revenue Code in the United States, which governs these types of plans. They are specifically created to encourage individuals to save for educational costs by providing certain tax benefits. When you contribute to a 529 plan, you are setting aside money that can be used to pay for qualified education expenses, such as tuition, fees, books, supplies, and sometimes room and board. These plans are commonly used to save for higher education, such as college or university expenses, but they can also be used for other educational pursuits. While the Federal rules for 529 College Savings Plans are established by the IRS, each state is responsible for administering their own version of the program.

2️⃣ Funds in a 529 plan grow tax-free, and withdrawals are also tax-free if they’re used for qualified education expenses.

One of the main advantages of a 529 plan is its tax benefits. The earnings on the funds invested in a 529 plan grow on a tax-deferred basis, meaning you won’t have to pay taxes on the investment gains as long as the money remains in the account. Additionally, when you withdraw money from a 529 plan to pay for qualified education expenses, those withdrawals are not subject to federal income tax. This tax-free treatment applies to both the principal contributions and the investment earnings, making 529 plans an attractive option for saving for education.

In addition to federal state tax benefits, there may be state tax incentives depending on your state of residence and whether you participate in your state’s 529 College Savings Plan. For example, Illinois offers a state tax deduction for contributions to the state plan up to $10,000 for single filers or $20,000 for those who are married filing jointly.1

3️⃣ You can may be able to use 529 savings to pay for more than just college – including K-12 tuition, apprenticeship programs, and payment of student loans.

While 529 plans are commonly associated with college savings, they can be used for a broader range of educational expenses. In addition to higher education costs, you may be able to use some 529 plans to pay for qualified K-12 tuition expenses. The Tax Cuts and Jobs Act of 2017 expanded the use of 529 plans to include up to $10,000 per year per beneficiary for K-12 tuition expenses at public, private, or religious schools. It is important to note that some states (including Illinois) have not ratified this rule and do not consider K-12 expenses qualified distributions, so it is important to discuss your options with your financial planner or tax advisor to understand their full implications. 

College savings plans are not just for the traditional 4-year track college students. 529 plans can also be used to cover expenses related to registered apprenticeship programs. This provides individuals with the opportunity to use their 529 savings to invest in vocational or trade education programs, further expanding the potential uses of these plans.

529 College Savings Plans may also be used to pay principal or interest on a beneficiary’s or their sibling’s student loan. The amount eligible for loan repayments is limited to only $10,000 per lifetime.

4️⃣ You can start a 529 plan for anyone, including yourself, and contribute up to the plan’s maximum contribution limit.

One of the flexible features of 529 plans is that they can be established for anyone, not just your immediate family members. This means you can open a 529 plan for yourself, a child, a grandchild, a niece or nephew, a friend, or anyone else you wish to support in their education. Additionally, there are no income limitations for contributing to a 529 plan, making it accessible to individuals with different financial circumstances. The maximum contribution limit for a 529 plan varies by state, as each state has its own rules and regulations regarding these plans. It’s important to check the specific limits set by the state offering the plan you are interested in.

5️⃣ If your child doesn’t end up needing the funds, you can easily transfer the money to another family member’s 529 plan.

Life is full of uncertainties, and it’s possible that the intended beneficiary of a 529 plan may not end up needing all or a portion of the funds for educational expenses. In such cases, 529 plans offer the flexibility to transfer the money to another family member’s 529 plan without incurring taxes or penalties. The ability to change the beneficiary allows you to redirect the funds to another individual who may have educational needs, such as a sibling or cousin. A new rule going into effect in 2024 permits 529 plan owners to convert a portion of the college plan to the beneficiary’s Roth IRA. Under this provision, the account must have been open for 15 years and it will allow a maximum of up to $35,000 to be rolled over into a Roth IRA over time. There are several nuances to this rule, so please reach out to your financial advisor to discuss how this might fit into your particular situation.

Overall, 529 plans can be an excellent tool for families who want to save for educational expenses while taking advantage of tax benefits. With the ability to grow funds tax-free and use them for a variety of educational purposes, these plans offer a flexible way to invest in your loved ones’ future. If you need assistance with setting up a 529 plan or have questions about how to use one, don’t hesitate to reach out, our team can help you understand the benefits of a 529 plan and guide you through the process of opening one. Contact us today to learn more.

The information provided in this communication was sourced by Tenet Wealth Partners through public information and public channels and is in no way proprietary to Tenet Wealth Partners, nor is the information provided Tenet Wealth Partner’s position, recommendation or investment advice. This material is provided for informational/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Registered Representatives of Sanctuary Securities Inc. and Investment Advisor Representatives of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., an SEC Registered Investment Advisor. Tenet Wealth Partners is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.


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