529 savings plans have been developed in each US state as a way for parents and grandparents to save for college expenses. The term 529 comes from a section within the IRS Code. These accounts are funded with after tax dollars and the earnings are tax-free if used for qualified, higher education expenses. The maximum annual contribution limit per year, per account is the annual gift tax exclusion limit, currently $14,000 per person. Under federal law, married couples may contribute $28,000 per year, per child (account). Alternatively, these accounts may be prefunded with a contribution of $70,000 per individual or $140,000 per married couple. If prefunded, you must file an IRS form 709 reporting the gift on Schedule A line b. The plan limit for each child is $452,510 and the money must be withdrawn by age 30. Earnings on funds not used for higher education are subject to income tax and a 10% penalty when withdrawn.
While not Federally deductible, a Pennsylvania resident may deduct their contributions to plans up to $14,000 per year per account ($28,000, if married), up to each spouses earned income amount on their PA income tax return. Funds in PA 529 plans are not subject to PA Inheritance tax.
For more information on 529 plans visit SavingForCollege.com – a great resource or feel free to give us a call!
Tip for Grandparents:
Accounts set up by grandparents do not get reported on the Free Application for Federal Student Aid form (FAFSA) so they do not count as family assets that may reduce financial aid. Since monies paid out of 529 plans you own for your grandchildren toward college expenses are considered gifts that may reduce financial aid, you may want to wait and pay toward their last year of tuition and qualified expenses.
Contributor: Bill Mayer, CFP