529 Plans as Gifts 

Giving or contributing to the gift of education for a loved one, if you are so inclined, is an impactful and rewarding way to exercise the act of giving. One way to do this is through a 529 Education Savings Plan. While 529 Education Savings Plans were originally designed to facilitate saving for higher education (college) expenses, the Tax Cuts and Jobs Acts (TCJA), signed into law in December of 2017, further expanded the use of 529 Plans to allow K-12 expenses to be included under the definition of “qualified education expenses.”

There are several tax-related advantages that go along with this unique “Gift of an Education” opportunity.

At the Federal tax level, all gift contributions to a 529 Plan are permitted to accumulate on a tax-deferred basis, and any earnings are tax free if the money is used to pay for the gift recipient’s (the 529 plan beneficiary) qualified education expenses. It is important to note that any earnings that are withdrawn and not used for a qualified education expense are taxed at the individual’s rate and subject to a 10% penalty. At the state tax level, some states offer tax deductions for your gift contributions to a 529 Plan; there are those states that also exempt qualified withdrawals from income tax. State-specific rules apply to the use of 529 Plans for K-12 education funding, as not every state has amended their rules to follow the federal tax treatment afforded to K-12 funding.

Connection to the Next Generation 

As your family may expand and welcome new children or grandchildren, this happy event is also a great time to consider how you may be able to help fund their education and establish a solid foundation of financial security and literacy in those younger generations of your family. When the time comes, you, with the help of your Financial Advisor, may consider discussing the reasons for the gift of the 529 plan with the beneficiary, and use this as a learning experience as they begin to establish their own goals and understanding of personal finances.