What is a 529 plan? Want to save for college? Wondering why it seems that other people seem to know how to better save money? Saving for college is something that can never be started too early. Like with any savings plan, 529s represent a long-term commitment and come with things to consider, such as penalties and restric­tions. So, before opening a 529 plan, here are a few things to keep in mind…

Potential gift tax penalty
Individuals are eligible to contribute $75,000  gift-tax free to a 529 plan when electing a five­year contribution, while couples can contribute  $150,000 tax-free over five years. Be advised that a gift-tax penalty may be imposed on contributions under two conditions: 1) If you make any additional contributions greater than the maximum gift-tax limits within five years and 2) if the contributor passes away before the five-year period has expired.  For those who elect to contribute per single year, the gift tax limits are $15,000 for an individual and $30,000 for couples.

Account fees
All 529 savings plans have associated fees- such as maintenance and enrollment. Be aware that some plan fees are higher than others. For example, plans purchased through a financial agency generally come with a higher upfront cost than plans bought directly through a state provider. Consider fees before making a decision. As always, we recommend for you to talk to your tax strategist or accountant, to make sure that everything is going according to plan.

Restrictions and penalties
If you use 529 funds for any non-qualified expense, you will be subject to income taxes and a 10 percent federal penalty. As such, be sure to use funds only for qualified expenses, such as tuition, books and boarding. If you aren’t sure if an expense is quali­fied, be sure to speak to your financial advisor. They can clarify these questions and really make sure that you’re being consistent and correct with your expenses. 

Available time to save
Consider how much time you have to save for college. This will affect your investment strategy and the plan you choose. Be sure to carefully analyze outcomes and investment options for your unique situation to ensure you save enough by the time you need the funds. As mentioned earlier, it seems like so many parents are saving money so quickly, when in reality, most folks start early on. It’s never too late or too early to start saving!

Understand the risk
While investing in a 529 plan is a sound tactic, it’s always possible that circumstances will arise that cause you to miss your target savings goal. To avoid this scenario, be sure to carefully mon­itor the progress of your 529 plan and make any necessary adjustments along the way. Always keep in contact with your tax advisor, and be sure to stay checked in throughout the year, and not just once a year.

Be aware of state income tax return benefits
Most states that have an income tax offer a tax benefit for contributing to state provider 529 plans. Additionally, some states offer a benefit regardless of who the 529 plan is through, includ­ing Arizona, Alaska, Kansas. Minnesota. Missouri, Montana and Pennsylvania. States that do not offer a tax return benefit include California, Hawaii, Kentucky, New Jersey, Delaware and Maine.

This is yet another great way to save money for college whether it’s for you, and your children. We love to teach financial literacy, and this is a major way to get ahead of the game! Be sure to think it through before you open a 529 plan. Of course. don’t think too long… your kids will be grown and ready to head off to college before you know it!