Senior Voice -

A good education is getting harder to come by, and that’s true not just for college but starting in kindergarten. If you are looking to help ensure your grandkids get a quality education, you might consider opening a 529 plan. If protecting your income from the estate tax is another goal, a 529 plan can help accomplish both. And with the new tax bill, The Tax Cuts and Jobs Act (TCJA), the rules for 529 plans just got easier. Not only can you use the plans to pay for college costs, but you can generally make tax-free withdrawals of up to $10,000 per year to pay for children attending private schools from kindergarten through 12th grade.

Here’s what you need to know about 529 plans:

These plans are sponsored by states, state agencies, and certain schools. Even if your grandchild is much too young for school today, you can lock in today’s tuition rates if you prepay tuition. Or you can use a tax-advantaged savings plan to pay school expenses. With a savings plan, you can contribute to a tax-favored investment account and withdraw not just the contributions, but also the earnings, free of federal taxes and generally also free of state taxes, as long as the education expenses are “qualified.”

What is a qualified expense?

This includes tuition, fees, books, supplies and equipment, and some (but not all) room and board. And thanks to the TCJA, this now – permanently – includes school expenses for grade school

and high school as well as college.

How a 529 plan affects your estate

The benefits of this type of plan are many, and far more flexible than most estate planning tools. Generally, you must relinquish control of assets (for example, by placing them in an irrevocable trust) to remove them from your estate. That’s called making a “completed gift.” With a 529 you retain control over the funds you put into the plan, but that money and the future earnings are removed from your estate and shielded from estate tax. Also:

- With a 529 plan you can change the beneficiary of your plan, if you wish.

- You can control the timing of the distributions.

- You can move money between plans, or

- Take your money out of the plan altogether (though you’ll pay penalties and taxes).

- You can make gifts to a 529 plan as part of your $15,000 per recipient annual exemption (or $30,000 for married couples), without using any of your lifetime exemption amounts, or triggering gift or generation-skipping transfer tax.

More nuts and a few bolts

- These plans can be used to fund education in colleges nationwide. So if you live in Idaho but your grandkid decides to go to school in Colorado, it doesn’t matter, as long as the school is eligible. You can check eligibility of colleges here: http://www.savingforcollege.com/eligible_institutions/

- The majority of states have at least one 529 plan, though they differ from state to state. Most are referred to as “set it and forget it” plans, meaning they are low maintenance.

- You can only fund these plans with cash contributions, not with other assets, such as stock. And you should know, the administrative fees may be higher than other types of investments.

- There is no tax deduction for contributions made to the plan, but the money is allowed to grow tax-free until the funds are withdrawn to pay for qualified education expenses.

Your money is invested in stocks, bonds, or mutual fund options offered by the plan, with no guarantee as to how much will be available when the beneficiary enters college.

In 2018, you or other family members can contribute up to $75,000 to a qualified plan in one year and count it as your annual $15,000 tax-free gift for five years. If the gift is split with your spouse, you can contribute up to $150,000, also for five years. However, if you die within the five-year period, a pro-rata share of the $75,000 returns to your estate. Grandparents can set up accounts for grandchildren, transferring large sums from their estates while providing for their grandchildren’s education.

One final point about 529 plans. Unlike many college savings tax breaks, these plans do not include income limitations for contributions, which is why many higher-income individuals love them.

As always, check with your trusted financial advisor about how a 529 plan fits into your overall financial picture.