Posted on Jul 02, 2021

Mini Grad Cap on a finger with text reading, Transferring wealth with a 529 education plan

Could using a 529 college savings plan be an easy way to transfer wealth across generations without much downside? According to Kate Dore of CNBC, it could be.

This type of account is mainly used for education it could be a way to avoid some estate taxes, of which the exemption is currently $11.7 million per person although President Joe Biden campaigned about reducing this number to $3.5 million. 

While there are no federal deductions for contributing to a 529, there are some tax advantages.

These plans can be used to invest and grow money in a tax-free environment for educational purposes such as college or vocational school. There is also a $10,000 allowance per year for grade school through high school tuitions as well as a lifetime allowance of $10,000 for student loan payments. Depending on the state there may also be other tax breaks. 

If the designated beneficiary does not require the funds for education, the beneficiary can be changed to someone of the same generation, either a sibling or even a niece/nephew. If the account gets overfunded and used for non-qualified expenses, they could owe income tax on some account growth plus a penalty that could vary depending on the state. Even with these penalties, the money in the account has grown tax-differed for a while.

This can also be another way grandparents can transfer wealth to their grandchildren and even younger generations. There are gift taxes to worry about but with 529 you can bypass these with contributions of certain amounts in a specific time period. 

Want to learn more about transferring wealth from generation to generation visit our website!

Ready to start planning for your future? Book a Strategic Planning Session today!

Read the full article on CNBC by Kate Dore here.