As kids get ready to head back to school this fall, I thought it would be helpful to focus this article on an estate planning strategy that also addresses a growing problem: college tuition.
The cost of college has skyrocketed over the last thirty years, which means that many students have had to take out federal and private loans just to attend. If you are planning to help your child or grandchild pay for college, you may want to consider a qualified tuition program.
Here are three things you should know about these estate planning tools.
What Is a Qualified Tuition Program?
First, let’s define what a qualified tuition program is. According to the Internal Revenue Service, a qualified tuition program “is a program established and maintained by a state, or an agency or instrumentality of a state, that allows a contributor either to prepay a beneficiary's qualified higher education expenses at an eligible educational institution or to contribute to an account for paying those expenses.”
Qualified tuition programs, also known as 529 plans, come in two varieties: prepaid tuition plans and education savings plans. In other words, qualified tuition programs allow you to prepay or save for your child’s education, and they often have benefits beyond paying for college.
What Are the Benefits of This Estate Planning Strategy?
Of the two types of 529 plans, the education savings plan is the more versatile. While beneficiaries can only use the prepaid plan for tuition and fees, they can use the savings plan for many different expenses associated with college:
Room and board
Computers and internet access
Supplies and equipment that are necessary for class
In addition to covering all of these expenses, qualified tuition programs also help beneficiaries and those who establish them in the following ways:
While in the account, earnings accumulate tax-free.
Beneficiaries usually do not need to report earnings from a qualified tuition program as income on taxes.
When beneficiaries use distributions from a savings plan to pay for qualified expenses, they generally do not incur a tax.
Many states also offer tax credits or deductions for contributions to a plan. Additionally, even though college is the most common reason people use 529 plans, they can also be used to pay for up to $10,000 per child in tuition at private Kindergarten-12th grade institutions.
Who Can Contribute?
While parents and guardians might have the most concern for their children’s education, contributions are not limited to them. In fact, grandparents, relatives, friends, and even beneficiaries can contribute to an education savings plan.
It is important to be aware, however, that contributions are capped at the amount needed to cover the tuition and qualified expenses in a given year, so be sure to coordinate contributions.
Interested in Learning More about this Estate Planning Strategy and Others?
It’s never too early to start planning for the future. Get in touch with me today if you want to discuss your goals.