Providing an educational legacy for your family

 

However, a 529 plan doesn’t have to fund a single child’s education, or even be reserved for a single generation.

The Basics of 529 Savings Accounts

A 529 plan is a method of saving for education costs, whether that’s K-12 or post-secondary education. As of 2019, you can now pay up to $10,000 of your student loans through 529 funds (or even fund a Roth IRA beginning in 2024, subject to certain limitations). 

 

These plans are tax-deferred, meaning you do not have to pay taxes on investment gains and earnings on the account each year.

 

• Each state in the country operates its own 529; some offer tax benefits for in-state members, and others may even offer tax deductions for 529s opened in other states.
• Not all states offer tax benefits.

 

The earnings on qualified withdrawals are exempt from federal income tax as well. Qualified withdrawals include tuition, expenses, books and supplies.

 

• Withdrawals may still be subject to state taxes.
• Non-qualifying withdrawals come with a 10% penalty against the earnings portion of your withdrawal as well as federal income tax on earnings.
• You’re not subject to taxes on the principal portion of a non-qualifying withdrawal since you already paid income tax on the contribution.

 

You can change the beneficiary of your 529 as many times as you want making education more affordable across generations.

 

• There are no tax consequences associated with doing so, as long as the beneficiary is a qualifying member of your family.

What is a Dynasty 529 Plan?

A Dynasty 529, often called a Multi-Generational 529 plan, can help offer multi-generational educational funding and the potential for perpetual tax-free growth.

 

A traditional 529 plan typically focuses on funding education for a single beneficiary, but a Dynasty 529 plan allows for the transfer of unused funds to future generations without incurring taxes or penalties.

 

With a Dynasty 529 plan, the account owner can name themselves as the primary beneficiary and designate successor beneficiaries, such as a child or grandchild, who can receive the funds. This allows for the continued growth and use of the funds for educational purposes by future family members.

Estate Planning and Tax Strategies

One strategy to consider if you’re wanting to use a Dynasty 529 for estate and tax planning purposes is overfunding—which means contributing more to a 529 account than the beneficiary needs to pay for school. For example, a student with a full or partial scholarship may not use all of their available 529 funds. Whatever funds remain can go to another qualified family beneficiary, such as a sibling, niece, nephew, or future grandchild. 

 

Opening an account and overfunding it consistently can help build tax-free interest against the account. The earlier you invest, the greater your potential returns could be. A plan with enough money in it to last beyond one benefactor could see sizable yearly returns, making your investment go farther. 

 

Also, an overfunded 529 can help lower your taxable estate, which may lower estate taxes while helping future generations get a good (and affordable) education. The IRS does not limit 529 plans, but states may cap how much you can put into a 529 every year. You can, however, make a taxable gift if you contribute more than the annual exclusion amount in any given year ($17,000 per beneficiary in 2023). 

Is a Dynasty 529 Right for You?

A 529 plan can be an essential, financially savvy part of your plan to pay for a family member’s education. With the right planning and funding, a 529 can help several generations pay for school. You can also use one or more 529 plans to help reduce your taxable estate, make tax-advantaged gifts, and grow tax-deferred investments that come with a modest penalty for non-qualified withdrawals. A wealth advisor from 1834, a division of Old National Bank can help you determine if this strategy is right for you.