Let’s talk about 529s. Many of you already have them or are interested in them. What are they? They are from section 529 of the Internal Revenue Code. Isn’t the tax code so ubiquitous? We call the accounts by the name of the section where they are found in the IRS code. Another example is a 401K. Open up the Internal Revenue Code, and it’s 75,000 pages or so. You would find section 401-K, and keep turning pages, and you would find section 529. Those are the educational accounts.
Due to our Senator Cruz and his amendment to the latest tax changes, we can now use 529s not just for after high school, like they were before, but now you can use 529s anytime for education. They can now be used for your kids’ elementary school, for the private school you want to send your kids to, and not just private school, but also for expenses that they have in public school.
The 529, if we read it, is really a type of trust. Trusts aren’t so complicated, necessarily. Trusts are legislatively created. For this type, you show up at your favorite financial advisor or you go online and say, “I want a 529 plan.” Actually what you are creating is a trust. A trust is just a relationship between a trustee and a beneficiary. In a 529 plan, you are the trustee for your kid who is the beneficiary. Like good trusts, you can change the beneficiary at any time.
Here are the important things to remember. When you are putting money into a 529 plan, it is a gift. We can only gift up to $15,000 per person per year without tax implications. I did not say you can’t give more than $15,000; you can give anybody as much as you want. But, if you give more than $15,000, there will be tax implications. In a 529, you or your spouse can give $30,000 combined a year without tax implications.
There are additional special rules under 529s. You can take that $30,000, multiply it by 5, and put in $150,000 at one time. You may say, “Wait a minute Matt! I don’t have $150,000 burning a hole in my pocket. I just have $1500.” And my answer to that is, “What about your parents?” Remember, with a 529, anyone can give to it. Your parents, your spouse’s parents, your uncle, your aunt; they can all contribute if they want to find a way to give to your kid. They don’t have to open a 529 for your kid. They can give to the 529 you already have.
There are a lot of new rules with the new tax codes. Stay tuned to keep up with them. 529s are more powerful than ever. Assets in them can grow tax free, and can be used tax free, when used for educational purposes now or anytime in your life, for nearly any type of educational opportunity.
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