Thursday, January 10, 2008

Maximizing The Tax Benefit Of Our College 529 Plans

Since we plan to pay for our three year old's college education, we continue to make contributions to a 529 plan, even though we retired in our forties. Since our state allows deduction of 529 contributions for tax purposes, we typically add an amount equal the maximum deduction allowed. However, when we first opened the account, we learned that we could maximize tax deductible contributions by also opening a 529 account for my spouse and me. This works because the 529 account funds can be transferred to a different beneficiary, who is also a family member, at any time. Thus, in the future, we can combine all three accounts for my daughter's use.

Of course, 529 plans already offer tax exempt earnings when used for higher education expenses. The flexibility to transfer beneficiaries provides us several additional benefits:

  • Triples our yearly deduction for state tax return. Our state has a yearly maximum deduction for each beneficiary of a qualified 529 plan. By opening three 529 accounts for my spouse, our daughter and me, we can deduct the maximum of each account. This also triples the amount we contribute each year for the eventual benefit of our daughter.

  • Enables parents to use the funds for themselves. Since we are the beneficiaries of two accounts, we can use the funds for ourselves should we decide to take additional higher education courses. Of course, our first priority is our daughter's education, but it may make sense based on tax benefits for us to use the funds first.

  • Pre-fund an account for a future child. A 529 account can be created for an expected child in the future by opening it for a "family member" and later transferring it to the new child. In our case, we have already opened 529 accounts for ourselves. Therefore, we would need to open a 529 account for one of our parents (i.e. the child's grandparents) or first cousin in order to have a direct beneficiary transfer to the child.

  • Since we are in the process of adopting a second child, we will consider the option of pre-funding a 529 account when the adoption date is set.

    For more on Crossing Generations , check back every Thursday for a new segment.

    This is not financial or tax advice. Please consult a professional advisor.

    Copyright © 2008 Achievement Catalyst, LLC

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