Tax Savings with a 529 Plan
If you’re saving for college, consider a Section 529 plan. Although contributions aren’t deductible for federal purposes, earnings avoid income taxes if used for qualifying educational expenses. In addition, many states, including Ohio, offer tax incentives for contributions.
Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, equipment, supplies and, generally, room and board) are income-tax-free for federal purposes and most states, thus making the tax deferral a permanent savings.
529 plans offer other benefits as well:
- They usually offer high contribution limits, and there are no income limits for contributing.
- There’s generally no beneficiary age limit for contributions or distributions.
- You can control the account, even after the child is of legal age.
- You can make tax-free rollovers to another qualifying family member.
Finally, 529 plans provide estate planning benefits: A special break for 529 plans allows you to front-load five years’ worth of annual gift tax exclusions and make up to a $70,000 contribution (or $140,000 if you split the gift with your spouse).
The biggest downside may be that your investment options — and when you can change them — are limited.
It’s important to manage your withdrawals from your 529 to fully take advantage of the eligible tax credits. For example, you can benefit from both 529 withdrawals and educational credits in the same year, however the same expenses cannot qualify for both the 529 income exclusion and the educational credit.
The best advice we can offer is, “Don’t go it alone.” Contact James Komos, CPA, CFP, at Ciuni & Panichi, Inc. today to explore tax strategies that will position you for a good tax season in 2017 at 216-831-7171 or jkomos@cp-advisors.com.