I want to start putting money away for my children. Is a 529 plan the best vehicle for savings?
Saving for your children’s future is an admirable goal but it’s important to do so in the most tax efficient way. Remember that you can transfer up to $13,000 per year tax-free to any individual. In addition to this annual exemption, you can make unlimited payments toward another individual’s medical or educational expenses as long as those funds are paid directly to the provider.
A 529 plan is a program designed to encourage savings for higher education. It enables you, the Contributor, to take advantage of Federal and (if applicable) New York State tax savings. It is not limited by the annual exclusion although it carries other limitations like a lifetime cap on contributions and a five-year limit of $60,000. It also allows the contributions to grow and be withdrawn tax-free if used for qualifying educational expenses. And knowing that you will be in a better financial position when your children enter college creates a sense of security. Plus, you are able to control the withdrawals, change beneficiaries, and transfer to another 529 plan at any time as long as you remain the owner on the account.
Grandparents can also contribute to a 529 plan and placing money into it affords other estate planning benefits. By contributing, they are moving money out of their own taxable estate while maintaining control over the funds as the owner. Keep in mind that as a New York State taxpayer, there is a deduction for your contribution to a 529 plan on your New York State income tax but for older generations, it is important to know that gifting of assets could impose penalties that may affect future eligibility for long-term care benefits through the Medicaid Program.
A 529 plan allows your child to apply the funds to her tuition, room and board, books, supplies, and other qualified higher-education overheads. Withdrawals from a 529 plan account for these expenses are federally tax-free, use of the resources is not limited to New York State, and the money can be used at any eligible post-secondary school in the United States or abroad.
With a 529 plan you are unable, or could be penalized, if you use the funds for purposes like summer camps, clothing, or vacations. If this is something you desire, other, more flexible banking structures provided in the Uniform Gift Act for Minors or the Uniform Trust Act for Minors would allow this kind of spending. Yet if you chose one of these options, your child will be entitled to control the account when she reaches 18. At which point, you could create a minor’s trust or fund a ROTH IRA or a regular IRA for her to ensure continuity of savings.
When undertaking any savings program for your kids, it’s never too early to start a conversation about finances. It’s one of the best ways to raise a responsible, happy, and successful adult.
Alison Arden Besunder is the founding attorney of the Law Offices of Alison Arden Besunder P.C., where she assists new and not-so-new parents with their estate-planning needs. Her firm assists clients in New York City, Brooklyn, Queens, Nassau, and Suffolk Counties. You can find Besunder on Twitter @estatetrustplan and on her website at www.besunderlaw.com.
