Learn how to leverage a 529 college savings plan 📚 to divert money you might otherwise pay into taxes toward your child’s college savings fund.
✨ Featuring Laurence Hale, AAMS®, CRPS®
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Learn how to leverage a 529 college savings plan 📚 to divert money you might otherwise pay into taxes toward your child’s college savings fund.
✨ Featuring Laurence Hale, AAMS®, CRPS®
- Subscribe to the You and Your Money podcast
- Follow us on Facebook, Instagram, LinkedIn and YouTube
- See how we can help you create a tailored strategy to help you Plan Well, Invest Well and Live Well: whzwealth.com
Welcome to You and Your Money. Empowering you to reach your goals with tips to help you Plan Well, Invest Well and Live Well. Today's episode features Laurence Hale, principal, managing partner and chief investment officer at Weiss Hale and Zahansky Strategic Wealth Advisors. Now on to today's topic. So now we're going to talk about 529 college savings plans and their tax benefits. Why don't we start with just an overview of 529 plans. Tell me about it. Sure. So a 529 plan is essentially a tax advantaged investment account that's sponsored by states to encourage families to save for future educational costs. So when you contribute to a 529 plan, it grows tax deferred, which is pretty powerful. And distributions are tax free when used for qualified, expenses like tuition, fees, room, book board, those kind of things. So that's I said tax free. That's a really important factor. So the tax benefits obviously the big deal about these plans. What are some of the biggest tax perks with these plans? Absolutely Gary. The major benefits are taxes are should be tax deferred growth tax free withdrawals. And in a lot of cases state income tax deductions for contributions. So first your money grows tax deferred meaning you don't pay taxes on the earnings of the account as it grows as you would a regular investment account. this enables the interest and growth to compound that much faster. Second, withdrawals are 100% tax free if used for those qualified purposes, those educational expenses. And third, finally, over 30 states offer a state income tax deduction if you use your own state's 529 and that includes Connecticut. That's, those are great incentives. So, Laurence, what are some smart strategies that our listeners could use to maximize those benefits of a 529? Well, there's really six key moves that people should know about when it comes to planning well, in using a 529. So first, if you're opening up a 529 account for the first time, you can front load up to five years worth of contributions to jumpstart tax deferred growth. So that's five times 18,000. And 18,000 is the 2024 annual gift exclusion limit. Or that that means a total of $90,000 in the first year that you're funding a 529. Second, in a lot of cases, take advantage of your own state's tax deduction if it's offered. Third, although you're are the owner of the 529 plan, your child is the beneficiary, so they have no actual ownership of the account That means that funds into the account are excluded from your taxable estate offering potential. another layer of tax efficiency in estate planning. Fourth, use more aggressive investments when your child's young and they have a while before college, that'll maximize the growth potential over time. And then gradually as your beneficiary, your child gets closer to college age, become a little bit more conservative. And the nice thing with a lot of these plans is, many of them offer investments that will actually do this for you as the beneficiary gets closer to college age. Fifth, for those, and these are some important recent changes to know about. So this came out, in some recent tax legislation. You can now use up to $10,000 per year from a 529 account for tax free withdrawals for K through 12 tuition or to pay student loans. And as of this year, and this is another biggie. If there's leftover funds in the account, if you're, or if your child decides not to go to college, you can change the beneficiary and roll up to $35,000 from the 529 account to a Roth IRA, which is more geared towards retirement savings. Again, there's, there's a lot of benefits here. 529s and, great advice here today and great information, as always. While you're here, on a related note to Laurence, it is February, and I understand February is Financial Aid Awareness Month. Tell me about. There's a there's a month for everything in our industry, I think, that's right, Gary February is designed as a time to help educate families on financial aid, including grants, scholarships, work study programs and student loans a big topic these days, so it's essential to explore all financial opportunities, in addition to your own savings, tools like a 529 plan when you're considering aid. The key is completing the FAFSA which is the financial aid form, and researching what might be available to you or your children, during that process. So let me, let me drill down on that a little bit. So, hypothetically, I live in Connecticut, but I have let's say I have a nephew who goes to college in Massachusetts. Can I still get a tax break for contributing to a 529? Right, so you've got two different states involved. So that's a great question. So the tax benefits are based on the state, your state of residence as the person contributing not where the student attends. So as a Connecticut resident, if a resident, if you contributed to Connecticut's 529 plan, you could potentially receive a Connecticut state income tax deduction, and your nephew could use those to go to a, you know, college anywhere in the country. All right. Another question. How about, prepaid tuition 529 plans that lock in future tuition rates to those have the same tax benefits? Yeah. So think of these as pay tuition now, without having to worry about tuition inflation over time. So, those plans do exist. They're not as widely used as the 529 option we've been talking about. But essentially you prepay future tuition now, but this only applies to state public colleges. So you're sort of in the box in terms of where you could, actually use these dollars. The benefits are still taxed, offer growth and tax free withdrawals. but in the big differences, they're locking in tuition rates versus an investment approach, that grows your assets over time. All right, so what if my nephew gets a scholarship? Doesn't need the 529 funds. Are there any options besides penalties? Yeah, another great question, Gary. So there's a few options in that case. First, you can simply change the beneficiary to another eligible family member. Meaning use it for a sibling a nephew niece, something like that. Second, you can now make tax free withdrawals of up to 10,000 per year for k-through-12 tuition. Our third, and this is really a powerful one that that just started this year, 2024. You can roll up to $35,000 into a Roth IRA to avoid tax penalties. So get a jumpstart on retirement savings now. Laurence, what a great conversation. and great insight to one 529 plans. If you're looking to add a 529 college savings plan, into your financial strategy this year or in the future, you can request a complimentary consultation on the Weiss, Hale and Zahansky website at whzwealth.com. You can call them 860-928-2341. Laurence, thanks for joining us and thanks for your insights today. Well, great to be able to share some insights into college savings. That's it for today. thanks for listening to You and Your Money. Find even more episodes, videos and other resources at our website. whzwealth.com Be sure to come back next week for more tips to help you live fearlessly and pursue your financial and life goals. Until then, live well. Weiss, Hale and Zahansky Strategic Wealth Advisors offer securities and advisory services through Commonwealth Financial Network member FINRA/SIPC, a registered investment advisor. Fixed insurance products and services offered through CES Insurance Agency. They practice at 697 Pomfret Street, Pomfret Center, Connecticut, 06259 and can be reached at 860-928-2341. Weiss, Hale and Zahansky Strategic Wealth Advisors do not provide legal or tax advice. The tenured financial services team strive to support clients in achieving their financial life goals. For more information regarding wealth management and customized financial planning with Weiss, Hale and Zahansky Strategic Wealth Advisors, please visit www.whzwealt.com.