A few weeks into the new year, many clients may have already given up on some of the more traditional New Year’s resolutions, making this a good time of the year to shift focus toward financial goals for 2019. Education savings is an important objective for most clients with children because of the ever-increasing cost of college tuition.
Post-tax reform, however, tax-preferred education savings possibilities abound even when college funding needs have yet to register on the client’s radar. While saving for college remains a central goal for many, it is now important to remember that tax reform has expanded the universe of possibilities for tax-preferred Section 529 savings even for those clients with young children who have a more immediate need for education funding.
Section 529 Education Savings Accounts
IRC Section 529 college savings plans are funded with after-tax dollars that are permitted to grow on a tax-free basis (much like a Roth IRA), so that distributions from the account are not taxed when received so long as they are used to pay for qualified higher education expenses.
Contributions to a Section 529 plan are limited to the annual gift tax exclusion amount—meaning that clients can contribute up to $15,000 per year in 2019. If contributions exceed that amount with respect to any single individual’s account, the contribution will be considered a gift that will generate gift tax liability. Clients also have the option of bundling their contributions for up to five years in a single year—making a $75,000 contribution in one year rather than over a five-year period.
Clients are permitted to fund multiple Section 529 plans for different beneficiaries without gift tax consequences, as long as the annual contribution for any particular beneficiary does not exceed the annual exclusion amount. The client is also permitted to change the original account beneficiary—for example, if one child chooses not to attend college.