Student loan debt in America sits at a staggering $1.748 trillion. The average debt per student is $40,274, meaning many college graduates are entering the workforce with substantial financial hardship.
As college costs continue to rise, families everywhere are focused on ways to reduce student loan debt for their future students. That’s where 529 plans come into play.
529 plans are one of the most used tools for helping families cover the cost of college or trade school. They’re well-known for their tax advantages when saving for higher education costs, but did you know that you can also use them to preserve generational wealth?
Here’s a quick overview of 529 plans and how affluent families can use them to create a legacy focused on higher education.
A Quick Overview Of 529 Plans
529 plans are state-sponsored vehicles for education investing. There are two types of 529 plans, a prepaid tuition plan, and college savings plan. The first is a fairly uncommon option, so we’ll focus on the latter.
You make contributions to 529 plans with after-tax dollars. So unlike a traditional IRA or 401(k), contributions don’t lower your taxable income. The tax advantage comes from tax-free growth and distributions for qualified education expenses.
If you use the withdrawals for an unqualified expense, you’ll incur a 10% tax penalty and be responsible for paying income tax on the distribution.
529 plans are unique because they don’t have an annual maximum contribution limit. You could contribute a small amount every year or make a giant lump sum contribution if you wanted.
Since 529 plans are created to fund a child, grandchild, or other loved one’s education expenses, contributions count as gifts. That makes them subject to the gift tax, but contributing less than the annual gift tax exclusion can help avoid it. For 2022, the gift tax exclusion is $16,000 for individuals and $32,000 for joint filers.
While there are no maximum annual contributions, every state has its own lifetime contribution limit. A common contribution limit is $500,000, but you’ll need to check your state’s plan to confirm your specific contribution limit. If your state’s contribution limits are lower than you’d like, it is possible to enroll in any state’s 529 plan.
But, many states offer tax breaks on contributions, and contributing to a different state’s plan would mean missing out on this tax break. Missouri residents can deduct contributions to their state’s 529 plan up to $8,000 filing single and $16,000 married filing jointly on their state income tax returns.
529 Plans Are Super Flexible
529 plans offer flexibility, which is why some families use them for multigenerational education planning.
It’s easy to change beneficiaries; in most states doing so won’t trigger a taxable event. This is a significant advantage, as it allows you to retain the same account and simply transfer the beneficiary to your children, grandchildren, and even great-grandchildren as needed.
It’s also easy to change the owner of the 529 plan, which makes it more feasible to pass the account down from generation to generation.
Multigenerational College Planning using 529 College Savings Plans
Multigenerational 529 Plans present a fantastic financial and estate planning opportunity.
The goal of this type of long-range planning is to fund the account in a way that multiple generations can then use to pay for education expenses. This happens through a combination of contributions and compounding interest.
You’re likely asking yourself, “How do I go about funding this type of strategy?”
As a start, you could try contributing up to the gift tax exclusion every year. It’s also possible to make five years’ worth of contributions at one time without going over the gift tax limits. For 2022, that would be $80,000.
If you receive a sudden windfall, like an inheritance or winnings, you could over-fund the account. If you go this route and exceed the gifting limits, it will count against your estate’s lifetime exclusion limit, which is currently at an all-time high of $12.06 million.
We mentioned earlier that it’s easy to switch between account beneficiaries. But what if multiple people need the funds at once? In that case, you can do a partial transfer of assets.
529s are one of our favorite ways to create a long-term family legacy and shield family wealth from future income and estate taxes for many decades. This multigenerational college planning strategy is especially relevant in a time when all tax rates are likely to rise to fund climate change, COVID debt, income inequality, inflation, and more.
Make Education Part of Your Estate Planning Legacy
529 plans are excellent long-term tax planning opportunities, thanks to their tax-free growth and tax-free withdrawals for education expenses. Incorporating them into your estate planning strategy is an incredible way to expose your investments to tax-free growth and greatly impact future generations.
Remember that $40,274 in average student loan debt? Imagine your great-grandchildren graduating from college totally debt-free. That’s a gift that creates a solid financial foundation benefiting them for the rest of their lives.
If education is a core value, implementing 529 plans with a financial advisor in this way could effectively tie your money to that value. If you’re ready to learn more about establishing a 529 plan for multigenerational college planning, don’t hesitate to give us a call or send us a message.
Craig Toberman is the Founder of Toberman Wealth – a fee-only, fiduciary financial advisor based in St. Louis. He assists families and businesses with strategic financial planning and long-term wealth management. He has over a decade of experience in financial services and has crafted custom financial plans for hundreds of families and businesses.
Craig received a Bachelor of Science (B.S.) degree in Agricultural and Consumer Economics from the University of Illinois and a Master of Business Administration (M.B.A.) degree in Finance from Saint Louis University. He is a Certified Financial Planner (CFP), Chartered Financial Analyst (CFA) charterholder, and Certified Public Accountant (CPA).
Craig is a member of the National Association of Personal Financial Advisors (NAPFA), Fee-Only Network, and XY Planning Network.
Craig lives in the greater St. Louis area with his wife, Ally and son, Hank.