Consider making 529 Plan gift to graduate

By Andrew Zashin*

It’s May which means millions of students will be graduating from high school and college this month. If you have been considering a gift for a high school graduate or a college grad bound for graduate college, you have most likely thought about gifting the conventional cash or check. However, in lieu of cash, you may want to consider contributing to a 529 plan or paying for a consultation with a financial adviser.

A 529 plan is an education investment account that allows an account holder to place after-tax contributions in an account that can be withdrawn in the future for a beneficiary’s educational expenses including tuition, room and board. Money held in a 529 plan can be used for elementary and secondary school tuition along with college and graduate school expenses. The earnings that come from investing in a 529 plan cannot be taxed so long as funds withdrawn from the plan are used to cover qualified expenses (i.e. tuition, books, computers, room and board, etc.).

Anyone can contribute to the 529 plan and most plans make it extremely easy for individuals to do so. For instance, many plans prominently display links for donating to students’ accounts on their internet home pages. By making a gift to the 529 plan, not only do you assist the recipient, but you can also receive a tax benefit. 529 Gift contributions are deductible from your Ohio taxable income. Contributions up to $4,000 per year, per beneficiary (made payable to the Ohio Tuition Trust Authority) can be deducted. Further, contributions over $4,000 can be carried forward to future tax years until fully deducted.

But what if your college graduate will not be going on to graduate school – does it make sense to contribute to their 529 plan? The answer may still be yes. The 2020 Further Consolidated Appropriations Act 2020 allows account owners and beneficiaries to withdraw 529 funds to pay on qualified education loan payments. The loan repayment provision applies to repayments up to $10,000 per beneficiary. The $10,000 is a lifetime amount, not an annual limit. The good news is an additional $10,000 can be used to repay student loans held by each of the beneficiary’s siblings. Before gifting to a 529 plan, it is best practice to consult with a financial adviser and the account holder in advance since there can be significant financial consequences associated with all involved.

If a 529 contribution is not the right option for you or your graduate, you may want to consider paying for your graduate’s consultation with a financial advisor. According to a recent survey performed by Real Estate Witch, a significant amount of college graduates expect to earn a starting salary of over $100,000 upon graduation. The reality is that the average college graduate makes approximately $55,000 their first year out of school. Therefore, a college graduate who is entering the workforce may be about to make more money than they ever have in the past, but not have a clear understanding of how far a dollar stretches. This can sometimes result in the graduate making poor financial decisions. In an effort to assist your graduate from falling into this trap, you may want to provide the gift of sound financial advice by linking your graduate up with a financial adviser. While not glamorous, such a gift can have a positive effect on the graduate for many years to come.

This article originally appeared as a column for the Cleveland Jewish News.

2023-11-10T13:38:06-05:00May 20th, 2022|529 plan, education savings plan|

Saving for your child’s education

By Andrew Zashin*

Following the birth of my daughter, my spouse and I began looking at college tuition rates and anxiously saying to one another, “if college is expensive now, imagine how expensive it will be in 18 years.” This “sticker shock” led me to research, and eventually open, one of the most commonly used educational savings accounts for the benefit of our daughter, a 529 plan.

However, selecting a plan was more complicated and nuanced than we originally envisioned.

The United States Securities and Exchange Commission defines a 529 plan as, “a tax-advantaged savings plan designed to encourage saving for future education costs … (that) are sponsored by states, state agencies or educational institutions and are authorized by Section 529 of the Internal Revenue Code.”

Essentially, there are two types of 529 plans available to forward-looking parents: prepaid tuition plans and education savings plans. Prepaid plans allow the account holder to buy credits at participating colleges and universities for future tuition at current prices for the benefit of another. Better said, an account holder is able to lock into a participating college or university’s current tuition rate to pay for future college credits which will presumably be more expensive in the future.

The typical prepaid tuition plan, however, cannot be used to pay for room and board. This type of plan does not permit the account holder to prepay for elementary, middle or high school tuition either.

It is also important to note that, only a handful of states, offer prepaid tuition plans and only some plans allow the funds to be used towards out of state tuition. For instance, Ohio does not offer a prepaid tuition plan, therefore, this type of plan was not an investment option for me. My daughter’s grandparents, however, live in a state in which prepaid plans are both available and may be used at a college or university in their state or at an out-of-state school, and for that reason, they have opened a prepaid tuition plan for the benefit of my daughter.

Given the restrictions associated with pre-paid tuition plans, the education savings plan is the more commonly utilized of the 529 plans. Education savings plans, also known as the college savings plan, allow an account holder to place after-tax contributions in an investment account that can be withdrawn in the future for a beneficiary’s educational expenses including tuition, room and board. Money held in an education savings plan can be used for elementary and secondary school tuition along with college and graduate school expenses. The earnings that come from investing in a 529 plan cannot be taxed so long as funds withdrawn from the plan are used to cover qualified expenses (i.e. tuition, books, computers, room and board, etc.).

In addition, Ohio offers a tax deduction for account holder contributions to a 529 plan up to $4,000 per year. However, this is not to say that an account holder is unable to contribute more than $4,000 to a 529 plan per year. If an Ohioan tax payer and account holder contributes more than $4,000 in a particular year, the tax payer can deduct the overage the following year. The aforesaid tax benefits combined with the versatility of the plan, caused me to open an education savings plan for the benefit of our daughter.

While my spouse and I are comfortable with our 529 plan choices, our choice may not be right for you and your family. Prior to investing or purchasing any 529 plans, it is important to read the terms, conditions and prospectus of potential plans to make sure that you understand the nuances that may exist. Further, it is important to remember, that while researching 529 plans may be arduous at times, it’s always better to start saving early because your child will be 18 years old before you know it.

This article originally appeared as a column for the Cleveland Jewish News.

2023-11-10T13:38:08-05:00January 15th, 2021|529 plan, education savings plan|
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