Education the Gift of a Lifetime

No one needs another ugly sweater. This year, give a gift that lasts a lifetime: education.

College costs are rising, but with strategic planning and saving, parents (and grandparents) can give their children a head start by saving for college through a 529 account. This special tax-free savings account can only be used for educational expenses but offers significant advantages to the student and the saver.

529 accounts: A win-win for the whole family.

"A 529 is an investment account that encourages people to save for education by providing tax advantages for qualified expenses," explained First Interstate Wealth Management Financial Consultant Lisa Vnoucek. "One of the great features of a 529 is that nearly anyone may contribute, including parents, grandparents, extended family, friends, or the beneficiary themselves."

A 529 account can help you save more money than a traditional savings account because it takes advantage of tax exclusions.

"While savings accounts are quite secure, their growth potential is limited, and they do not provide special tax advantages,” Vnoucek shared. “Earnings in a 529 used for qualified education expenses are exempt from federal and state taxes in many cases.” 

This makes 529 accounts an effective vehicle for managing an end-of-year tax burden.

"Contribution limits to 529 plans are based on the annual gift tax exclusion. For 2022, you can contribute up to $16,000 per beneficiary – or $32,000 for married couples who are gifting – without gift-tax consequences," said Vnoucek. "However, there is an opportunity to make a larger lump sum contribution under the special election provision. You may accelerate five years' worth of investments by contributing $80,000 at one time or $160,000 for married couples. This larger contribution would require specific tax filing for which you should consult your CPA."

And more than one person can set up an account for the same beneficiary. So, if grandma also wants to save for junior's college education, she can. You can also start a 529 account for yourself.

Vnoucek noted that a 529 is not the only way to save for college; however, it provides the longest list of advantages compared to other education savings options. 

A little strategy goes a long way.

Consider what type of college — public, private, or community — you expect your child to attend. Then use a College Savings Calculator to estimate how much money you’ll need to save. 

Remember to factor in extra expenses, including lab fees, tools, and transportation. The average family spends an additional $1,700 to $3,300 per semester on other college costs.

“Common qualified expenses include tuition and fees for accredited institutions such as trade and vocational schools, community colleges, theological seminaries, and private K-12 schools,” said Vnoucek. “They would also include room and board, books, and equipment required for participation in a certain program. If you have questions as to whether an expense is qualified, it's important to consult your financial professional."

Be sure to ask how a 529 account might impact your student's eligibility for federal financial aid because a 529 is considered an asset. But the tax-free investment gains earned in your 529 account could likely outweigh any student's aid package reduction. Once again, consultation with your financial professional and tax preparer is critical.

Know your options.

We can't predict what the future holds. Your student might earn a scholarship negating the need for family support. The rising demand for tradespeople could steer your child toward a two-year associate degree when you'd budgeted for a bachelor's.

So, what happens to your money if your student takes the road less traveled? 

"If a child doesn't use 529 funds for education, there are several options for what may happen with the account. There are ways for other family members to utilize the funds for education expenses while benefiting from the tax advantages," said Vnoucek. A 529 account can be transferred to another beneficiary without penalty if the new recipient is a relative.

That means you could repurpose the money if you need to train in a different industry, your spouse wants to finish a long-delayed degree, or you have other children to put through school. But here's the kicker – who the account holder is matters.

"A 529 is also one of the few gifted assets that allow the owner to maintain control of the account regardless of the beneficiary's age," said Vnoucek. "The beneficiary may also use the funds for non-education purposes, but tax advantages would not apply in this scenario."

Get the expert advantage.

It's important to remember that a 529 is a variable investment account. The investment may lose value, and the investment strategy does not guarantee that investors' education savings goals will be met.

"Saving for education, as with any investing, can be complex. As noted above, there are a lot of options when it comes to accounts," said Vnoucek. "So, it's important to work closely with your financial professional to determine if a 529 account best suits your needs."

A financial professional can simplify the process by knowing which type of account will provide the greatest advantage based on your situation. Our team of skilled Wealth Advisors and Financial Consultants are prepared to help you develop a plan that grows with your family. Make an appointment today.

Prior to investing in a 529 Plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as a financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings.