The sweet smell of Martha’s cookies is in the air and the lakes are finally warm enough to dip a toe in. It is late summer here in Minnesota and that has us thinking about the pending start of the school year. Minnesota graduates, on average, 62,700 students each year. Many of those students will go on to post-secondary education. This could mean a community college, technical school or a traditional four-year degree program. Enter the 529 plan. The 529 plan is named for the section of tax code it references, similar to its cousin, the 401(k). Also like the 401(k) plan it is a vehicle to assist with growing assets saved for a particular purpose (education, in the case of the 529) tax-free to reap maximum potential gains until the need arises to use such finds.

529 Plans 101 – Foundations:

Every state as well as the District of Columbia offers and administers a 529 plan. Each state’s plan has different fees and requirements. You do not need to utilize your state of residence’s plan, however, so it can make sense to compare plans. Once you’ve settled on a plan and opened the account you can begin making contributions.You can choose allocations according to your preference and the age (and hence the risk tolerance) of the prospective future student. The money grows tax-free until you are ready to use it for qualifying educational expenses.

The benefit and allure of the 529 plan is the tax-free beauty of compounding gains. The money input into the plan is post-tax, therefore the contributions are not further taxed. The contributions are not deductible at the federal level however the disbursements can be made tax-free. Any gains the account realizes through the life of the account are not taxed. Additionally, there are no income limits as to who can contribute to a 529 plan. There is favorable tax treatment of gifts and estate contributions to 529 plans as well.

529 Plans 201 – Theoretical Applications:

Once the decision has been made to save for education, the next question is, “how much?” Step one is to estimate the cost of the education you wish to fund. An online college calculator can often help with large and well-known schools to project college costs. For example, if a child is born in 2018 and wishes to attend the University of Minnesota Twin Cities Campus in 2037, the projected future cost of school (tuition, room and board, etc.) is $300,000. This estimate is for a four-year degree ($27,500 in-state current cost taken at a 5% annual increase).

Only you can decide the right amount to save and anticipate but your Advisors at White Oaks want to help you with that determination. It is our goal to fit your priorities into your plan so the children can have peace of mind for their education and you can have the same for your retirement goals. There are contribution limits to 529 plans depending on the plan, but those generally range from $235,000-$520,000. Contributions can also qualify for the gift tax exclusion so long as they are under the federal limit.

529 Plans Capstone – Using your Knowledge:

The funds in the plan can be disbursed for educational purposes tax-free when needed. If the beneficiary listed does not use all of the funds for education the funds can be transferred to another beneficiary. You can even transfer the funds to yourself with no penalty. This gives the funds great flexibility and hedge against the scenario where the child does not attend school.

If no one else in the family uses the funds for educational purposes the fund monies can still be withdrawn. In this situation the distributions will be subjected to a 10% federal penalty on the earnings portion only. The earnings will also be subject to income tax and may be subject to state taxes and penalties as well. Non-use of funds due to scholarship, death, military service or some other approved exception means the 10% penalty will not be charged and only the earnings will be taxed.

A 529 plan can be a useful tool in preparing for the education of your family. It is one of many tools to be thoughtfully considered when devising a comprehensive financial plan. White Oaks Wealth Advisors wants to make sure that your financial plan is successful in achieving the goals you have set out for yourself and your family. Ask us about how we can help you incorporate your 529 needs into your plan. Now go jump in the lake while the water is still warm!

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