Capture five tax benefits with a 529 college savings plan

Columbia Management, Investment Team | March 21, 2014

  • By contributing to a 529 plan, you may benefit from tax advantages — without giving up control of plan assets.
  • As an estate planning tool, 529 plans may allow removal of significant assets from your taxable estate.
  • Investment growth in a 529 plan, as well as distributions, is not subject to the new 3.8% net investment income surtax.

Owning a home. A financially secure retirement. A college education for a child or grandchild. These are aspirations most of us can relate to. Fortunately, there are tax incentives available to help you pursue these substantial financial goals. In the case of college savings, 529 plans offer distinct tax advantages over other college savings vehicles.

With a 529 plan, parents, relatives and friends can help fund a significant portion of a loved one’s future college expenses and at the same time enjoy many added benefits as a 529 plan account owner. It is important to note that, as the account owner, you are always in control of the assets in the 529 plan account. And, 529 account owners can benefit from the following tax advantages:

  1. Earnings in your 529 college savings grow exempt from federal and state income taxes, so they have the potential to accumulate faster than they would in comparable taxable investments.
  2. There is no federal income tax (and in most states, no state income tax) on withdrawals used to pay for qualified higher education expenses. And, if it turns out your original beneficiary does not need the 529 account assets for college, you can change the account beneficiary to another family member of the original beneficiary without penalty.
  3. Assets contributed to a 529 plan are removed from the owner’s taxable estate. Due to special provisions available only with 529 college savings plans, you can contribute up to $14,000 per year ($28,000 for married couples), per beneficiary without triggering federal gift taxes. Contributions are considered completed gifts and are excluded from your taxable estate, even though you as the account owner maintain control of the assets in the account.
  4. Accelerated gifting provisions provide additional gift and estate tax planning flexibility. You can take advantage of a special forward gifting provision that allows you to contribute up to $70,000 ($140,000 for married couples) per beneficiary in a single five-year period, gift tax free, as long as there are no further gifts to the beneficiary in the same five-year period.
  5. A 529 plan can help you avoid new taxes. Beginning in 2013, a new 3.8% net investment income tax is imposed on certain unearned income of high-income individuals, estates and certain trusts. However, growth in a 529 plan, as well as distributions, are not subject to the 3.8% tax.

To learn more about the tax advantages of a 529 college savings plan, contact your financial advisor.

The tax information set forth in this article is general in nature and does not constitute tax advice on the part of Columbia Management Investment Distributors, Inc. or its affiliates. The information cannot be used for the purposes of avoiding penalties and taxes. Consult with your tax advisor regarding how aspects of a 529 plan relate to your own specific circumstances.

Withdrawal of earnings not used for qualified higher education expenses will be subject to federal and possibly state and local income tax and may be subject to an additional 10% federal penalty tax.