529 Plans: The Overlooked Tool in Your Year-End Tax Planning Arsenal
The end of any year marks an ideal time to assess your financial strategies — especially those that offer dual benefits, like the 529 plan. The 529 plan not only helps with education savings for family members, but it can also provide significant tax advantages when appropriately leveraged. Understanding how to use this powerful savings vehicle as a year-end tax planning strategy can mean the difference between contributing to a loved one’s education — and contributing to a loved one’s education while reaping benefits that help keep more money in your pocket.
Understanding 529 Plans
A 529 plan is a tax-advantaged account designed to encourage saving for future education costs. Contributions to these programs grow tax-free, as do any withdrawals for qualifying education expenses. Put simply: As long as you use the funds for eligible educational purposes, your investments can grow without incurring federal income taxes when withdrawn. These qualifying expenses may include things like:
- Tuition and Fees (college, vocational, and even elementary and secondary)
- Room and board
- Books and supplies
- Student loans (principal and interest)
- Computer equipment and internet access
The plan may even cover specific equipment and services for a student who has special needs. The wide range of future uses for your savings makes incorporating 529 plans into your year-end tax planning a strategic move.
Year-End Tax Planning with 529 Plans
State tax policies also come into play when investing in a 529 plan. For example, in Colorado, contributions to any CollegeInvest account are eligible for a deduction from your state income tax return. In 2024, these state deductions are limited to $22,700 per taxpayer per beneficiary for single filers or $34,000 per tax filing per beneficiary for joint tax return filers.
It’s important to note that the window for contributing is running out for this year. To claim deductions for the 2024, contributions must be made by December 31. Acting now ensures you can take full advantage of these benefits while setting up your family for future success.
529 Plan Strategies for Grandparents
The 529 program can prove especially advantageous to grandparents who want to support a grandchild’s education and minimize their own tax burden. Grandparents can make substantial contributions to these plans without incurring gift taxes through a strategy known as “superfunding.” The IRS allows individuals to front-load a 529 plan with up to five years’ worth of gifts in a single year.
Given that the annual gift tax exclusion is $18,000 per beneficiary in 2024, superfunding means a grandparent can contribute up to $90,000 per beneficiary at once without triggering gift taxes. For married couples, this amount doubles to $180,000 if giving jointly. Superfunding not only jumpstarts the growth potential of the investment by allowing more time for compounding but also reduces the size of the grandparent’s taxable estate, which can be beneficial for estate planning purposes.
Additionally, grandparents looking for meaningful holiday gifting ideas can consider a contribution to a 529 plan and meet their year-end giving deadline. Unlike toys or cash gifts, this contribution grows tax-free and creates a lasting legacy by supporting a child’s education.
Steps to Open or Contribute to a 529 Plan Before Year-End
If you’re ready to take advantage of the tax benefits and education savings opportunities a 529 plan offers, opening or contributing to an account is straightforward. Whether you’re starting fresh or adding to an existing plan, acting before the year-end deadline ensures you can maximize the benefits for 2024. While these steps are simple, consulting with a financial advisor at the start can provide tailored guidance to help you make the most of your investment.
Here’s how to get started:
- Research and Select a Plan: While it’s often beneficial to choose your state’s plan for deductions, compare fees, performance, and investment options to ensure the best fit for your goals.
- Open an Account: Setting up a 529 plan account is typically quick and can be done online. Have the beneficiary’s information ready, such as their Social Security number and date of birth.
- Make Contributions: Contributions must be made by December 31 to qualify for this year’s deductions. Keep track of limits, especially if you’re using the superfunding strategy to maximize both your gift and estate tax benefits.
- Set Up Automatic Contributions: Automating regular contributions can help you stay on track with long-term savings.
By starting with professional advice and following these steps, you can help provide meaningful support for your loved ones’ education and also reap valuable tax benefits before the year ends.
Contact Lunsford Financial Planning
Navigating the complexities of 529 plans doesn’t have to be overwhelming. The team at Lunsford Financial Planning is here to help you tailor a strategy that ensures your contributions support your loved ones’ education while aligning with your broader financial goals. Schedule a consultation with Lunsford Financial Planning today to maximize your 529 plan benefits before the year-end deadline and make the most of this powerful tax-saving opportunity.
Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP® in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.
