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August 11, 2023

The 101 on 529s

Financial Planning Committee

What is a 529 Plan?

A 529 plan allows donors to invest for a beneficiary’s education in a tax-advantaged way. When saving into a 529 plan, contributions may be eligible as tax deductions. Any growth or accumulations within the 529 plan is tax-deferred. Additionally, funds can be withdrawn from a 529 tax-free if utilized for qualifying higher education expenses.

Who Can Contribute

Anyone can contribute to a 529 plan account and name anyone as a beneficiary. Yes, that means you, your friend, a child’s grandparents or godparents can all set up or contribute to a 529 plan for your child.

Additionally, a beneficiary can have multiple 529 plans for their education. So, grandparents can have a 529 plan while you and your spouse have a separate 529 plan. Oftentimes, we find families elect to have one person (e.g., Grandma) own the 529 for a child and everyone contributes to that plan.

Annual Contribution Limits

Annual contributions are typically limited to the current year’s gift tax amount (currently $17,000 per person). Any additional contribution in that year may be subject to gift tax. There is one caveat to these potential gift taxes – every 5 years, a donor is allowed to make a lump-sum contribution of up to $85,000 into a 529 plan without having to pay any gift taxes (for example, contribute $85,000 in year one and make no contributions in years two through five.)

Tax Deductions

In certain states, the person funding a 529 can receive a tax deduction or credit when they contribute a certain amount to a 529 plan. Be sure to consult with your JNBA Advisory Team or a tax professional as some states will require you to contribute to their state’s 529 plan to receive the tax benefit. Other states, such as Minnesota, have “reciprocity” with other states’ plans, meaning the donor could potentially be eligible for a tax benefit regardless of which state’s plan they utilize.

529 Plans for K-12 Expenses

529 plans can also be utilized to offset tuition beginning at kindergarten through 12th grade, up to $10,000 per year. Consider consulting with your JNBA Advisory Team or tax professional as this is a federal law that can be overridden at the state level.

For those residing in Minnesota, distributions for K-12 expenses will only be federal tax-free, meaning those distributions will be taxed at the state level. 

If you have any additional questions about how to utilize a 529 plan, please do not hesitate to reach out to your JNBA Advisory Team.

Due to various factors, including changing market conditions and/or applicable laws, some of the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors.

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