When you are planning your estate, you may decide that you would like to provide educational opportunities for younger members of the family. This can be the greatest gift of all because you are giving them the ability to achieve their full potential as human beings.
529 Savings Plans
A 529 savings plan is the ideal approach for many people. The structure is similar to the Roth individual retirement account.
You contribute into the account after you have paid taxes on the income. The growth is not taxable, and when the student withdraws money to go to school, the distributions are not subject to taxation.
Traditionally, 529 plans were strictly college savings plans, but this restriction was removed when the Tax Cuts and Jobs Act went into effect in 2018. You can now withdraw up to $10,000 per year to pay for K-12 expenses.
Savings Plan vs. Prepaid Tuition Plan
There are two different types of 529 plans, and they both have their advantages. With the traditional savings plan, the money in the account can be used to pay expenses at any approved institution.
In our state, we have the Connecticut Higher Education Trust (CHET) 529 college savings plan. It is easy to set up an account in a matter of minutes, and contributions start at $15 per pay period.
You get a state income deduction with a cap of $10,000 per year. In addition to tuition, books, and fees, the funds can be used to pay for room, board, supplies, and computers.
The other option is the prepaid tuition plan for in-state public universities only. You do not have the same freedom of choice, but on the other hand, you are buying credits at the current rate.
Contribution Limits and Early Withdrawals
You can withdraw money from a 529 account for any reason, but there is a 10 percent penalty, and the earnings would be subject to regular income taxes.
There are lifetime contribution limits that vary depending on the plan in question. For the Connecticut Higher Education Trust 529 plan, the limit is $300,000 per beneficiary.
We should point out the fact that you can change the beneficiary when you have a 529 savings plan. This can be useful if the original beneficiary did not use all of the funds.
Estate Taxes
The federal estate tax is unified with the gift tax, and the unified exclusion is $11.58 million. This is the amount that you can transfer before the tax would become applicable.
We should point out the fact that this is a record high exclusion, and it is scheduled to be reduced to $5 million adjusted for inflation at the end of 2025.
Here in Connecticut, we have a state-level estate tax with a $5.1 million exclusion, and we are the only state in the union that has a gift tax as well.
Money that you contribute into a 529 savings plan would be removed from your estate for tax purposes, but you would be giving a taxable gift. However, there is an additional gift tax exclusion that sits apart from the unified lifetime exclusion.
You can use this exclusion to give as much is $15,000 to any number of gift recipients within a calendar year free of taxation. With this in mind, you could contribute this much into any number of 529 college savings plans every year and the gift tax would not be a factor.
Attend a Free Seminar!
We are conducting a number of estate planning seminars over the coming weeks, and you can learn a lot if you attend one of these sessions. There is no charge, but we ask that you register in advance so we can reserve your spot.
You can visit our seminar page to see the schedule. When you identify the session that you would like to attend, follow the simple instructions to register.
Mr. Horowitz was awarded his Juris Doctor degree with honors from the University of Connecticut School of Law. While attending law school, Mr. Horowitz received the American Jurisprudence Award in Legal Ethics and the Nathan Burkan Award.
After graduation from law school, Mr. Horowitz continued his legal education at New York University School of Law where he received a Post Doctorate Law Degree in Taxation. He has also recently received a national achievement award.
Mr. Horowitz is admitted to practice before all the state courts in the State of Connecticut and the United States District Court.
Mr. Horowitz was selected for Super Lawyers in 2021.
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